Float Down Options

For some borrowers, a mortgage rate lock that locks in a particular interest rate may be helpful. However, if the interest rates drop during the lock period, the rate lock may be problematic. Some mortgage rate locks have a float down option, which allows a borrower to have security against rate increases, as well as an option to take advantage of any interest rate drops during the same period. At Pulgini & Norton, our experienced Boston real estate attorneys can advise homebuyers and lenders on float down options.

Rate locks are not free, and those that have a float down option are more expensive. The lender charges the borrower a fee to lock in the interest rate for a particular time period with the assumption that the mortgage will fund during this lock period. The longer the period, the larger the lock deposit that may be required. Once the mortgage funds, the lock deposit is credited to a borrower, and if the borrower does not secure a mortgage in that period, they lose the lock deposit. Some lenders do not charge lock deposits.

Lock periods may be helpful for borrowers because they remove some of the uncertainty associated with changes in mortgage rates, and they may make a big difference to monthly payments. Float down options provide even greater protection because they constitute an option to reduce the lock rate if the market rates drop. This option is more valuable to borrowers than it is to lenders, and thus they cost more.

When there is a float down option, you have a right to get the reduced rate as a borrower. This means that you do not need to leave a particular lender and restart your loan search if there is a drop in rates. The lender may design its own float down terms. Since there is no standard, it may be particularly important to consult an attorney who can advise you on what you are committing to pay. The terms may include requirements related to when you can exercise the option, the minimum decline in rates or points that allows you to exercise it, and how the floated down price will be determined and told to you. It is important that you get a written communication related to the floated down price.

What if you decide not to exercise your float down option? You may go to another lender. Often, the lender that originally provided you with a lock will make you wait for a few months before locking another loan. In some cases, lenders adopt policies to discourage borrowers from doing this, such as charging non-refundable fees or only offering float downs in connection with refinancing.

Whether you are a borrower or a lender, it is important to understand the terms of a loan commitment, including float down options. At Pulgini & Norton, our Boston real estate lawyers can assist you with each step of securing a mortgage and entering into a residential property transaction. Our firm represents buyers, sellers, associations, and lenders in Hyde Park, Brookline, and Somerville, as well as other Massachusetts cities. Call us at 781-843-2200 or contact us through our online form for a free consultation with a home financing attorney.