Mortgage Rate Lock Float Down

  

Categories: Mortgage

See: Mortgage. See: Mortgage Rate Lock.

Locking in a low interest rate on a mortgage is awesome, no doubt about it. But what happens if interest rates fall even further during our lock period?

Well, if we’ve got a “mortgage rate lock float down” going on, our interest rate can be adjusted downward to match the current going rate. The best part about this option is that it only works in one direction. If rates go up, for example, we’re still locked in with our nice low rate. The not-as-great part is that we usually have to pay a fee to initiate the downward float, and sometimes those fees can be steep. But if the interest rate drop is substantial enough, we’ll more than likely make up the cost of the fee with our reduced mortgage payments.

Related or Semi-related Video

Finance: What is Adjustable-Rate Mortgag...17 Views

00:00

Finance allah shmoop What is adjustable rate mortgage or arm

00:08

Well here's an arm and here's a leg and that's

00:11

What Renting the money to buy a home costs you

00:14

Yeah Okay Eight r m stands for adjustable rate mortgage

00:17

The rate well that's The interest cost of the money

00:20

or the cost of renting that money to buy the

00:23

home Well the rate isn't it fixed in this case

00:26

like five point seven percent for thirty years Where you

00:28

know in advance that your monthly payments going to be

00:31

nine hundred forty three bucks a month or whatever it

00:33

is that would be a fixed mortgage a fixed number

00:37

You can count on it for all three hundred sixty

00:40

payments And then the house is all yours So that's

00:43

fixed then what's adjustable like yes the interest rate changes

00:47

But how does it change Well in a standard arm

00:50

there is some global standard on which the rates are

00:53

often price like lie bore the london interbank borrowing offering

00:57

rate It's one of the key things that price is

00:59

the cost of renting money all around the world with

01:02

the actual rate of libel or is generally reserved for

01:04

banks like super cheap cost of renting money to banks

01:08

who are very likely to pay back the money with

01:11

no hassle that rate is more or less what banks

01:14

pay for running the money along with blue chip customers

01:16

in real life The banks then mark up a premium

01:19

on top of the rate that they're paying to rent

01:22

the money to themselves And then they resell or re

01:26

rent that money teo their prized customers So the pricing

01:30

of bank my views in renting money to joe six

01:33

pack could be something like lie boer plus three percent

01:37

or three hundred basis points So if libel or is

01:40

it didn't say two and a half percent today the

01:43

adjustable rate might be five and a half percent and

01:46

all that's great honor given alone It might mean that

01:48

for a while you're paying seven hundred twelve dollars a

01:51

month for your house payment wonderfully cheap and in fact

01:54

banks market these low rates initially to help people be

01:58

able to afford tto by that new home and live

02:00

of the dream You know the american dream usually with

02:03

an arm there's a teaser rate that starts really low

02:07

Like at live or live or plus ten basis points

02:11

or something like ridiculously cheap for six months or a

02:14

year something like that Then it has an incremental set

02:17

of step ups in interest costs and venit adjust with

02:21

the markets usually upward maybe upward by a lot Remember

02:26

there's a reason it's called a teaser rate but then

02:29

if we get inflation or a you know just bank

02:32

nervousness for there are weird effects from brexit or the

02:35

volume of transactions going through london or something weird happens

02:39

Well then the liquidity drops and interest rates rise So

02:44

now lie board goes up and up and up to

02:46

four and a half percent and wealth contractually in your

02:50

mortgage paperwork you have to pay live or plus three

02:53

hundred basis points no matter what So now that's seven

02:56

and a half percent interest on the dough you borrowed

03:00

and well we're that toe happen It's likely that your

03:02

monthly payment has skyrocketed from seven hundred twelve dollars a

03:06

month is something more like twelve hundred dollars a month

03:09

or more Can you handle that big of a payment

03:11

Well have you done a fixed rate loan at nine

03:13

Hundred forty three dollars a month Well you'd still be

03:15

paying on that number but you rolled the dice with

03:18

an arm and now you owe big bills There go

03:22

that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

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