How do rate locks and float-down options work for mortgage borrowers?
A rate lock guarantees the interest rate offered by a lender for a set period while your mortgage moves through underwriting to closing. It protects you from upward moves in market rates. A float-down option is a separate feature you can buy when you lock that allows the lender to lower your locked rate if market rates decline by a stated amount before closing. Both are risk-management tools: the lock limits downside (rising rates); the float-down limits opportunity cost (missing a drop).
Authoritative guidance and background
- The Consumer Financial Protection Bureau explains how timing and loan terms affect mortgage costs and emphasizes checking lender disclosures for lock terms (consumerfinance.gov).
- Federal Reserve commentary and mortgage-market data show how short-term rate expectations and Treasury yields drive mortgage pricing (federalreserve.gov).
These resources provide context but not a single rule: lenders set lock windows, fees, and the terms of any float-downs.
Why borrowers use locks and float-downs
- Certainty: A lock fixes your interest rate so you can calculate monthly payments and compareloan affordability while underwriting proceeds.
- Protection: If rates move higher during the lock window, the lender still honors the locked rate (subject to the lock agreement).
- Optional upside: Float-downs let borrowers capture a better rate if the market improves before closing — useful when you expect rates could fall.
Common terms and timelines
- Lock periods commonly run 30, 45, 60, or 90 days, and some lenders offer longer locks for construction loans or delayed closings. Ask for the exact expiration date in writing.
- Float-downs can be single-use (one adjustment allowed) or conditional (only if rates fall by a set threshold). Some lenders restrict float-downs to a specific time window before closing.
- Cost: Float-downs are typically priced as a flat fee or an increase in the loan’s rate expressed in discount points or basis points. Common structures seen in the market in 2024–2025 include option fees equivalent to 0.125%–0.50% of the loan amount or a charge of one discount point in some programs. Exact pricing varies by lender and loan program.
Practical examples and a simple calculation
Example A — Savings from a float-down:
- Loan amount: $300,000 fixed-rate 30-year
- Original locked rate: 4.25%
- New lower rate after float-down: 4.00%
Monthly principal & interest (approx):
- At 4.25%: $1,474
- At 4.00%: $1,432
- Monthly savings: $42
- First-year savings: ~$504; 30-year interest saved is substantially larger (roughly several thousand dollars in interest over the life of the loan), though exact long-term savings depend on prepayments and other factors.
If a float-down option cost 0.25% of the loan ($750 on $300,000), you would compare the fee to the expected first-year savings and long-term interest reduction. In this example, paying $750 to save $504 in year one is borderline; the value increases if you plan to keep the loan long term.
Example B — Protection from a lock:
- Suppose you lock at 3.75% for 45 days and rates spike to 4.75% before closing. Without the lock you would face a much higher payment. The lock prevents that immediate increase (subject to lender underwriting and closing on time).
Key contract details to read closely
- Lock effective date and expiration date: Know when coverage starts and ends. Delays in appraisal, title, or underwriting that push past the lock can trigger extension fees.
- What is included: Some locks guarantee only the interest rate; fees, points, or credits can still change until closing depending on the lock terms.
- Float-down mechanics: Will the lender automatically apply the lower rate or let you elect it? Is there a threshold (for example, a 0.125% required drop) before the float-down applies? Is the float-down limited to certain loan types (conventional vs. VA/FHA/Jumbo)?
- Fee treatment: Is the float-down fee charged up front, added to closing costs, or applied as an extra point? Ask whether the seller can pay float-down fees as part of concessions if negotiated.
Who benefits most from each tool
- Rate locks: Best for borrowers who want certainty during underwriting, buyers in contract who face tight closing timelines, or borrowers who prioritize predictable monthly payments.
- Float-downs: Best for borrowers who expect a short-term drop in rates, who can tolerate paying an option fee, and who plan to hold the mortgage long enough to justify the cost.
Limitations and common pitfalls
- Extensions: If a closing delays past your lock expiry, lenders typically offer extensions for a fee or require a new lock at the current market rate.
- Not all loans offer float-downs: Policies differ by lender and loan type. Government programs (FHA, VA) or specialized products may have restrictions.
- False sense of security: A rate lock protects only the rate in writing. If underwriting discovers credit, income, or property problems, the loan could still be denied or re-priced.
- Cost versus benefit: Small rate moves may not offset float-down fees. Always run a break-even calculation.
How to evaluate the math: a simple checklist
- Calculate the monthly payment difference for the rate change you’re likely to get.
- Multiply monthly savings by the expected holding period (months or years you plan to keep the loan).
- Subtract the float-down fee (or fee equivalent) to get net savings.
- Consider nonfinancial factors: stress, certainty, and seller timelines.
Professional tips from lending practice
- Request written lock terms at the time you lock. Verbal promises are not adequate.
- Ask how the lender handles rate-lock extensions and what the extension costs would be.
- If you expect a closing delay, discuss a longer initial lock even if it costs more — extension fees can be higher than a longer lock priced in advance.
- Use a mortgage broker or compare direct lenders; brokers can sometimes offer more flexible lock products or multiple float-down options. See our guide on how mortgages are priced and when buying points makes sense for broader context (How mortgages are priced: Rates, points, and fees explained: https://finhelp.io/glossary/how-mortgages-are-priced-rates-points-and-fees-explained/).
- Review how locks interact with rate buydowns and seller credits; combining tools can change net costs.
Related guides on FinHelp
- Mortgage basics and the closing timeline provide context for when to lock a rate: Mortgage Basics: From Preapproval to Closing Day (https://finhelp.io/glossary/mortgage-basics-from-preapproval-to-closing-day/).
- For help deciding between locking early and waiting, see our comparison of preapproval and prequalification timing (Mortgage Preapproval vs Prequalification: https://finhelp.io/glossary/mortgage-preapproval-vs-prequalification-key-differences/).
FAQ (short answers)
- Can I lock and then change lenders? Typically no — a lock is with a specific lender. If you switch lenders you’ll need a new lock.
- Does a rate lock guarantee loan approval? No. Approval still depends on underwriting. The lock guarantees the rate, not the outcome.
- Are float-downs refundable? Rarely. Option fees are usually nonrefundable; confirm before paying.
Final checklist before locking
- Confirm lock start and end dates in writing.
- Check whether the lock is for rate only or includes fees/points.
- Ask whether a float-down is available, how it’s priced, and the trigger conditions.
- Run the break-even math for float-down costs vs expected savings.
- Note extension fees and strategies for handling delays.
Professional disclaimer
This article is educational and reflects typical industry practice and market observations as of 2025. It does not replace personalized financial, tax, or legal advice. For a decision that affects your mortgage costs, consult your lender or a licensed mortgage professional and review lender disclosures carefully (see Consumer Financial Protection Bureau at https://www.consumerfinance.gov/ and Federal Reserve materials at https://www.federalreserve.gov/).
