How Do Home Mortgage Brokers Float Loan Rates?

Floating Interest rates

Mortgage brokers float interest rates by locking in a maximum rate while simultaneously allowing for a lower interest rate, should rates fall before the loan funds. This process is commonly referred to as a float-down.

Rate Lock

A rate lock protects you from an increase in interest rates from the time you apply for a mortgage loan until the time the loan actually funds. On a lock, a mortgage broker will typically promise you a specific rate and terms for your loan. This protects you from the downside of changing market conditions, but what about the upside?

Protection from Improving Market Conditions

The rate float-down allows you to benefit from improving market conditions by lowering the loan interest rate should rates decline before the loan closing. You have to pay for this rate float-down.

Cost of Floating Interest Rate

The actual cost varies with each lender. Your mortgage broker will give you the exact cost to float-down the interest rate. The mortgage broker pays a premium when locking your rate for the float-down and passes this cost on to you.

Cost vs. Benefit

You should always ask your mortgage broker for a copy of the price sheet. This allows you to verify that you are getting what you pay for by floating-down your mortgage rate. You have to decide on a case-by-case basis if this cost is worth it for you after carefully considering current market conditions.

Lock Jumping

Another alternative to purchasing a float-down is to lock-jump. This means that you lock you loan without purchasing a float-down option and simply switch lenders should market rates improve prior to closing. Lock jumping, while technically not illegal, does increase the cost of locks for all borrowers. Lock-jumping is also usually not a good alternative on purchases that need to close on a specific date.

References

• Mortgage Professor Website: What Is a Float-Down?