Mortgage banker uses float down option to save clients money

Mortgage banker: Harry Sessa

Purchase price: $1,200,000

Loan amount: $960,000

Loan type: Non Conforming jumbo

Backstory: Harry Sessa received a referral from a former client for a $1.2 million home in the New Haven area with 20% down.

The borrowers were well qualified and received their approval within three weeks leaving them approximately six more weeks to closing. They had initially locked his rate at 4.00% with zero points for 60 days.

Due to market conditions, mortgage rates dropped over the last few weeks to the lowest point in 28 months. About two weeks before the closing, Sessa received a call from his clients asking if he could lower their rate. This is commonly referred to as a rate “float down.”

Once your lender locks your rate, your loan is committed for sale on the secondary market investor at that rate. This is not to be confused with servicing your mortgage or the collection of taxes and insurance in escrow by your lender for payment on your behalf.

If the loan is ultimately delivered to Fannie Mae, Freddie Mac or another investor at a lower rate than initially locked, there is typically a fee due from the lender, which is deferred back to the borrower.

Many lenders have the ability to float rates down while they are in process. Some will charge an optional upfront fee at the outset to cover their loss and will give you the ability to change your rate to a market rate during your processing period.

Other lenders have a builtin formula allowing for the ability to reduce your interest rate, which also passes on the cost. Typically this opportunity is limited to the time period before your closing papers are issued.

Sessa was able to reduce the rate for these clients from 4% to 3.875% as part of his company’s formula for meeting these requests.

The new rate was not quite as low as it would’ve been with a new application because of the cost the bank had to absorb to deliver the loan on the secondary market at the lower rate. The clients did not have to come up with any extra cash to do this and were pleased to be able to achieve considerable long terms savings with the new lower rate.

To summarize, before you decide on your lender ask if they have a policy for reducing your rate during the processing based on market conditions. In a declining rate environment, this could be the best decision you’ll ever make when choosing your next mortgage company.