What If Your Rate Goes Down Before you Close?

Understanding What Happens to Your Locked Interest Rate if Rates Improve Before Closing

Transcript

Ryan Hillard: Are you wondering what might happen to your interest rate if you’ve already locked it but rates improve before you actually close? If so, then this is gonna be the video that you wanna check out.

The Importance of Market Conversation When Locking Interest Rates

Ryan Hillard: Now what happens in most situations is when you go to lock your interest rate, you should be having a conversation with your lender about what is going on in the market, and how volatile is it? Where do we anticipate that those rates are going to go? And taking that in combination with your own risk tolerance to make as educated of a guess as possible as to whether or not you wanna lock the rate and have it set right there or if you want to continue to float and see if the market improves or not. Now, assuming that you were to lock the rate, but you’re not closed on your loan yet, and the market actually improves…

What Happens if Rates Improve Before Closing?

Ryan Hillard: There may be a couple of options to take advantage of that, which in my opinion is probably pretty kind of the lenders, just because if rates were to increase, the lender is not gonna come back to the borrower and say, “Hey, I know we agreed on this over here, but we’re gonna retrade on our agreement and now we’re gonna charge you something higher.”

Lender Float-Down Policy or Rate Renegotiation Policy

Ryan Hillard: However, we do often see that borrowers will come back and say, yeah, I know we agreed on this rate over here. But the market got better. So, we want to take advantage of that improvement. So in order to account for this, a lot of lenders will have what we either call a float-down policy or a rate renegotiation policy or guideline.

Guidelines for Lender Float-Down Policy or Rate Renegotiation Policy

Ryan Hillard: Now, first, this is something that will and can vary among each lender. They’re gonna set their own guidelines for this type of policy. And there are some common things that they may keep in mind, but again, make sure that you are with the lender that you’re working with; if they do or do not have one of these policies in place, in an improving interest rate environment.

Some commonalities among them might be that you need to be through underwriting first. Meaning they want to basically know that this loan is going to close before they go and spend more money to renegotiate on a lock or anything like that. Also, they may not give you the full difference or the full benefits.

So just for a pure example case, let’s say that rates are in the mid-fives, and then they come down closer to five or somewhere than the high fours, maybe something like that. And rather than giving you the benefit or the borrower the benefit of going all the way down to what it would be exactly today.

They might either meet you halfway or give you, you know, a certain amount of that improvement. That way, they’re not out of pocket for the entire cost, and everybody still gets to win to some extent. And then another thing to keep in mind is that in some cases, they may want you to, or they may require you to close within a certain number of days once that renegotiation policy has already been set and has been established.

Assessing Risk Parameters and Making Educated Decisions

Ryan Hillard: And then, finally, you will only be able to do this once. This is probably the most common feature among these that they’re not gonna give you every little bit of improvement along the way if you are in the very beginning of this process, and you’ve already taken advantage of it once, and the market continues to improve, it is likely that you won’t be able to take advantage of it again. So it really is a thing where you need to assess your risk parameters, your risk tolerance, have a conversation with your lender, and make an educated decision to the extent possible, because none of us have a crystal ball that we can go and look at and tell you exactly what interest rates are going to.

But if you find yourself in that position, it’s certainly worth asking to see if you are able to take advantage of a rate renegotiation or float-down option.

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