float down

With interest rates shifting around the way they have been these last few months, many borrowers are hesitant to commit to a mortgage out of fear that rates could still fall back down further. Fortunately, loanDepot’s rate lock with float down feature can ensure they don’t miss out in the event they do.

If terms like “rate lock” or a “float down” are new to you, don’t worry. We’re going to cover the basics so you can decide if this might be a good option for you:

What is the difference between a “rate lock” and a “rate lock with float down”?

A rate lock is an arrangement where a lender agrees to reserve a current mortgage rate – say 4.60 percent – for a specific period of time, such as 30 or 60 days. If market rates go up during that period, you still benefit from the original rate as long as you close within that specified period.

A rate lock with float down is a specific type of rate lock that offers a specific advantage: If rates decline between now and the time you close your loan, you can still get the lower rate. This way, you are guarded against either possibility – should rates rise or fall, you can benefit from the lowest rate available during that time frame.

Get your hedge on utilizing a rate lock with a float down option

According to Investopedia, a rate lock with float down option can provide borrowers with a hedge against an increase during the rate lock period, while the float down feature allows borrowers to take advantage of a fall in interest rates during the lock period. It’s important to note that you can only exercise the rate float down option during your rate lock period. If the rate lock period expires (regardless of reason), the float down option becomes void and is subject to a relock.  

Should you get a rate lock with a float down?

A mortgage rate lock with a float down option can make sense if there is leeway in the market for interest rates to decline. For example, let’s say you locked an available market rate of 4.75 percent, but two weeks later rates fell to 4.50 percent. With a rate lock alone, you won't be able to take advantage of the falling market rates. However, with loanDepot's rate lock with float down option, if the interest rate decreases by at least a quarter of a percentile point (0.25) within 45 days of confirmed closing date, your rate will float down to 4.50 percent. Thus, by choosing this option, you could take advantage of the lower rate, potentially saving thousands of dollars over the life of the loan.

Mortgage rate lock with  float down can save borrowers money

As previously mentioned, a rate lock with float down can deliver substantial savings in interest paid over the life of the loan. Considering it’s not uncommon for a piece of economic data to shift the markets enough to change the rates by a quarter-point or more within hours, it may be a worthwhile option to consider. And, while there is an added cost associated with securing a rate lock with float down option, the savings can be significant with even a mere reduction of even a quarter of a percentage point (0.25). It could translate to thousands of dollars over the life of the loan.

You can calculate the difference yourself with our handy Mortgage Calculator. 

Understanding the impact of your interest rate

As an example, let’s take a look at a $350,000 home with 20% down and a conventional 30-year fixed mortgage.

Total interest paid over the life of loan:

4.75% interest rate / 4.781% APR - $245,821

4.50% interest rate / 4.531% APR - $230,739

 

That’s a total savings of $15,082! ($245,821 less $230,739)

 

Examples based on a 30-year fixed conventional mortgage. Purchase Price: $350,000.  Down Payment: $70,000. Scenario 1:  Interest Rate:  4.75%. APR: 4.781%. Monthly P&I of $1461. Scenario 2:  Interest Rate: 4.500%. APR: 4.531%. Monthly P&I of $1419. Monthly P&I does not include taxes, insurance, or other monthly fees. Loan limits may apply. Interest rates and APRs valid through 02/18/2019.

 

The reality is that you never know which direction interest rates will go. However, protecting yourself for a relatively small cost could be a better financial decision as compared to the costs incurred over the life of a loan at the higher rate. And while it’s not an easy decision to make, consider the level of risk you are willing to accept.

Interested in learning more about your rate lock with float down options? Contact one of our Licensed Loan Consultants today!

 

*APR = Annual Percentage Rate | This information is not intended to be an indication of loan qualification, loan approval or commitment to lend. Loans are subject to credit and property approval. Other limitations may apply.