A float refers to the loan status whereby interest rates and points can vary due to changes in market condition between the time of the borrower showing an interest and the time of actual loan application.
This is as opposed to a lock whereby an interest rate is committed by the lender and will not change even if market conditions change.
If there is no mechanism in place to protect lenders from unreasonable borrowers, a borrower can effectively walk into a bank and demand to be offered interest rates that existed a year ago.
However, there are of course time restrictions around floats and locks that a lender will set.
When a home buyer goes to a lender, he will be quoted the current interest rates that the lender offers on a mortgage. At this stage the interest rate is in a float status.
This means that should the borrower only apply for the facility a week later, and conditions have changes, the borrower will be quoted the new rate.
Depending on a lender’s requirements for an interest rate lock to be activated, which might be the submission of full documentation, once these requirements are met, only then will a lock be put into effect.
However, if at this point the borrower feels that there is a good chance that market rates would decline by the time the loan is processed and approve for acceptance, a float-down might be put in place.
Or else a fallout might occur.
A float down is having an interest rate lock in place, with the option of reducing the rate should market rates decrease during the lock period.
This enable a borrower to eliminate the fear of having to commit to an interest rate that is above the market.