Extended Rate Lock

This article assumes that you know the basics behind locking an interest rate. An extended rate lock is for purchase transactions only and can lock in an interest rate for as long as 12 months.

An extended rate lock is especially a great tool for new construction home loans. Extended rate locks “lock in” an interest rate and protects the homeowner from the potential of higher rates in the future.

Rate Locks Expire

All locked interest rates have expiration dates. When the lock expires, the rate is no longer valid.

Rate locks are typically based on 15-day intervals and measured in calendar days. “Normal” rate locks are typically 30 to 60 days. A rate lock can be as short as 15 days or as long as 90 days. Some lenders may offer a 120-day lock.

As an FYI, the rates shown on advertisements are typically 30-day locks.


mortgage rate lock Locking An Interest Rate With Top Lender in Dallas TX

Extended Rate Locks Explained

Extended rate locks are different than “normal” locks. Most notably, these locks require upfront money, have an artificial rate cap, and offer the option to “float down” the rate before closing.

Upfront Costs

Extended rate locks require upfront money. A home buyer may apply these funds towards closing costs at closing (depending on the loan’s structure). This option will be discuss below in greater detail.

Initial Rate Cap

Extended rate locks have an artificially higher locked rate. The interest rate increases the longer the lock period. Moreover, the amount of upfront cost – and whether it’s refundable – also impact the start rate.

Think of extended rate locks as an insurance policy. Doing an extended rate lock sets a “cap” on the interest rate which protects the homebuyer if interest rates increase before closing. All the while, the free rate float down allows the homebuyer to lower the interest rate in the event that rates are lower than the locked “cap” rate.

Rate Add-On

Each extended rate lock has a “rate add-on”. The base rate is a 60-day rate lock. As a result, that locked rate is then the sum of the 60-day lock and the add-on amount. This locked rate is the “cap”, or maximum rate.

The longer the lock duration, the higher the rate add-on. Remember, the upfront fee also impacts the amount of the add-on. See below for the extended rate lock options and their associated add-ons and costs.

Float Down Criteria

All the extended rate lock programs allow for a free, one-time, float down. A homebuyer can execute the float down feature if three criteria are met:

  1. The homebuilder (or seller) provides a firm, definitive closing date,
  2. The float down occurs within 60 days of closing, and
  3. Full credit approval has been issued by underwriting.

The interest rate float down can be explored once a definitive closing date has been provided by the builder. Builders typically provide a 30-day notice before closing.

The second criteria needed to float down the rate in an extended rate lock is that closing must be within 60 days.

The third criteria to float down the interest rate is to have the loan fully credit approved by underwriting. This means underwriting must have approved all credit documents – i.e. paystubs, tax returns, bank statements, etc..

Note: we do not require the appraisal, or title work, be credit approved to execute the float down feature.

Lastly, once these three conditions are met, we can float down the rate to current market rates (assuming that current market rates are lower than the initial “cap” rate). If current market rates are higher than the initial “cap” rate then we obviously won’t have the option to float down the rate.


Extended Rate Lock Options

Extended rate locks require upfront money. The homebuyer’s selected structure determines the amount of upfront money, and whether it’s refundable.

The upfront fees are a percentage of the loan amount. For instance, a homebuyer with a $300,000 loan, and a .5% upfront cost, will owe $1,500 to lock in the rate.


4-month lock (120 days)

The 120-day extended rate lock has two options. The difference is whether the upfront cost is refundable. To waive the refundability means a lower add-on is offered.

#1 Option: Refundable Deposit

  • Upfront Fee = .5% point
  • Refunded at closing = all of the .5%
  • Rate add-on = .25%

#2 Option: Non-Refundable Deposit

  • Upfront Fee = .5% point
  • The .5% is a fee and there is no refund
  • Rate add-on = .125%

6-month lock (180 days)

The 180-day extended rate lock as two option. The difference is whether the upfront cost is refundable. The rate add-on is lowered when the upfront money becomes nonrefundable.

#1 Option: Refundable Deposit

This rate lock option has higher rate add-on while allowing the upfront deposit to be refunded at closing.

  • Upfront Fee = .5% point
  • Refunded at closing = all of the .5%
  • Rate add-on = .375%

#2 Option: Non-Refundable Deposit

This rate lock option has lower rate add-on but does not refund the upfront deposit.

  • Upfront Fee = .5% point
  • The .5% is a fee and there is no refund
  • Rate add-on = .25%

9-month lock (270 days)

The 270-day extended rate lock program has three options. Similar to the 180 day lock programs, these options offer a combination of different costs and rate add-ons. The more money put upfront, the lower the rate cap.

#1 Option: Low cost with refund

  • Upfront Fee = .5% point
  • Refunded at closing = all of the .5%
  • Rate add-on = .5%

#2 Option: Middle ground

  • Upfront Fee = .5% point
  • The .5% is a fee and there is no refund
  • Rate add-on = .375%

#3 Option: Lowest rate with no refund

  • Upfront Fee = 1.0% point
  • The 1% is a fee and there is no refund
  • Rate add-on = .25%

12-month extended rate lock (360 days)

The 360-day extended-rate-lock program has three options. These options mirror that of the 270-day lock program. The more money paid upfront, the lower the rate add-on.

#1 Option: Lower costs with refund

  • Upfront Fee = .5% point
  • Refunded at closing = all of the .5%
  • Rate add-on = .625%

#2 Option: Lower costs, no refund, lower rate

  • Upfront Fee = .5% point
  • The .5% is a fee and there is no refund
  • Rate add-on = .5%

#3 Option: Lowest rate but more upfront

  • Upfront Fee = 1% point
  • The 1% is a fee and there is no refund
  • Rate add-on = .375%

Refund Details

Below are examples of when the upfront money will not be refunded.

Property address cannot change

Most importantly: the property address cannot change on a locked loan.  If a property address changes, the loan must then be withdrawn, and a new application must be originated with the new property address. The pricing on the new address will be subject to current market rates at the time of the new application.

Don’t let the extended rate lock expire

Every mortgage rate lock has an expiration date based on the duration of the lock. The interest rate is lost once it expires. All costs and credits associated with the rate are also null and void.

Do not let the rate lock expire. All deposits are forfeited, and will not be refunded, if the rate lock expires.

Extended rate locks cost money

Locks can be extended beyond their expiration dates; however, there is a cost associated with the extension. The cost of the extension depends on the duration of the extension.

Typical extensions are about .125% to .25% for 7 to 15 days, respectively. The longer the lock extension, the higher the costs.

Currently, the maximum number of days allowed for an extension is 30 days. Both the interest rate and collected money will be forfeited after the 30-day extension.

Be sure to close

If an application is withdrawn (i.e. the loan does not close), the extended rate lock fee will not be refunded.  Conversely, the extended-rate-lock fee will be returned if the loan is denied by underwriting.

Summary

In conclusion, we understand that this may be a ton of information to digest. Feel free to contact us with questions; we’re always happy to help.


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