Float Down Mortgages

Loans with attractive features are usually more appealing to borrowers than standard, by-the-books loans with fixed rates.  One feature that is being found in a growing number of mortgage loans is the “float-down.”  With a float-down loan, the borrower reaps the benefits of a lock on the loan, that is, the interest rate will not increase if the market rate increases.  Furthermore, the float-down loan’s key component is an option to reduce the interest rate if market rates decline.

This may sound too good to be true: a loan that will not increase if the market increases, but will decrease if the market deceases.  Since this type of loan has added value to the borrower, the lender must recoup that benefit in the form of a higher price.  This higher price is usually paid by the borrower in terms of additional “points,” or percentages of the total loan amount (1 point on a $100,000 loan is $1,000).  That being said, a regular fixed rate loan might ask a borrower to pay 1.5 points, but that same loan with a float-down option could require 3 or more points.  In general, the points will still be higher on a float-down than on a fixed rate loan with a lock for a certain period of time, in order to take advantage of potentially falling market prices.