Is There a Standard Float-Down?
August 5, 2002
"I have a rate lock with a float down, and rates have gone down since the lock. However, my mortgage broker says that he can't float down until the week of the close, and only if the rate is more than 1/4% lower. Is that right?"
Very possibly. There is no standard float-down contract. Each lender develops his own. Lenders and mortgage brokers are not always careful to explain the details to the borrower at the outset. And borrowers usually don’t know enough to ask for them.
A float-down is a rate lock, plus an option to reduce the rate if market rates decline. Since it carries more value to the borrower than a lock, and is more costly to the lender to provide, the borrower pays a higher price for it.
Not all float-downs are created equal, however, as you found out. Here are the questions to ask the lender or mortgage broker:
1. When can I exercise the option?
2. How often can I exercise?
3. Is there any minimum price reduction for exercise?
4. How is the current market price communicated to me?
The last point is worth stressing. I would not pay for a float-down where the market price is reported to you over the telephone with no further confirmation. At the time you lock, and again when you get to the exercise period, you should get a copy of the price sheet with the relevant price circled. If the lender has a web site that clearly identifies the price niche into which your deal falls, that’s even better. Then you know you are getting what you paid for.
"I have a rate lock with a float down, and rates have gone down since the lock. However, my mortgage broker says that he can't float down until the week of the close, and only if the rate is more than 1/4% lower. Is that right?"
Very possibly. There is no standard float-down contract. Each lender develops his own. Lenders and mortgage brokers are not always careful to explain the details to the borrower at the outset. And borrowers usually don’t know enough to ask for them.
A float-down is a rate lock, plus an option to reduce the rate if market rates decline. Since it carries more value to the borrower than a lock, and is more costly to the lender to provide, the borrower pays a higher price for it.
Not all float-downs are created equal, however, as you found out. Here are the questions to ask the lender or mortgage broker:
1. When can I exercise the option?
2. How often can I exercise?
3. Is there any minimum price reduction for exercise?
4. How is the current market price communicated to me?
The last point is worth stressing. I would not pay for a float-down where the market price is reported to you over the telephone with no further confirmation. At the time you lock, and again when you get to the exercise period, you should get a copy of the price sheet with the relevant price circled. If the lender has a web site that clearly identifies the price niche into which your deal falls, that’s even better. Then you know you are getting what you paid for.