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 secures an interest rate for a period beyond 120 days.

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

Basic Rate Locks Explained

When an interest rate is locked there is an expiration date associated with it. When the lock expires, the rate is no longer valid.

Rate locks are measured is calendar days and are typically done in 15-day increments going out as far as 90 days. “Normal” rate locks are typically 30 to 60 days. The rates shown on advertisements are typically 30-day locks.

Rates can be locked for 15, 30, 45, 60, 75, or 90 days. After 90 days the rate locks no longer operate in 15 day intervals. Moreover, rate locks beyond 90 days require up-front money to lock in the rate.


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. They require upfront costs, get locked with an artificial rate cap, and offer the option to relock and “float down” the rate before closing.

Upfront Costs

Extended locks require upfront money. Depending on the rate structure, it is possible that this upfront costs can be applied towards closing costs at closing. This will be discuss below in greater detail.

Initial Rate Cap

Extended locks have an artificially higher start rate. The farther out the lock is extended, the higher the rate. Moreover, the amount of upfront cost and whether it’s refundable also impact the start rate.

Think of extended locks as an insurance policy. Doing an extended rate lock means you up a “cap” on your interest rate. This means that the rate is protected in the event that rates increase before closing; however, the rate can be improved before closing in the event that rates are lower than the locked “cap” rate.

Rate Add-On

Each extended rate lock has a “rate add-on”. This means that we price out a “normal” 60-day lock and then increase the rate by the add-on amount. This becomes the initial rate that is locked. This “caps” the rate.

The farther out the lock the higher the rate add-on. Remember, the upfront costs 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

There are three criteria that must be met to float down the interest rate:

  • The builder provides a firm, definitive closing date
  • The float-down occurs within 60 days of closing
  • Full credit approval has been issued by underwriting

The interest rate can only be floated down once a firm closing date has been provided by the builder. We will ask the builder to provide the date in writing.

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

The third criteria to float down the interest rate is that your loan must be fully credit approved by underwriting. This means that all credit documents (like paystubs, tax returns, bank statements, etc.) must be approved by underwriting.

Note: we do not require the appraisal or title work for the loan to be credit approved.

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 Lock Options

Extended rate locks require upfront money. The amount of money, and whether it’s refundable, is determined by the selected structure. Below are the options offered.

The upfront fees are measured as a percentage of the loan amount. For example, a $300,000 loan with .5% costs will require $1,500 to be paid upfront.

4-month lock (120 days)

There are two different lock options for a 120 day lock. The difference is whether the upfront cost is refundable. To waive the refundability means a lower add-on is offered.

Option 1: Refundable Deposit

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

Option 2: Non-Refundable Deposit

  • Upfront Fee = .5% point
  • Refunded at closing = zero, no refund
  • Rate add-on = .125%

6-month lock (180 days)

There are two different lock options for a 180 day lock. The difference is whether the upfront cost is refundable. To waive the refundability means a lower add-on is offered.

Option 1: 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%

Option 2: Non-Refundable Deposit

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

  • Upfront Fee = .5% point
  • Refunded at closing = zero, no refund
  • Rate add-on = .25%

9-month lock (270 days)

There are three options for a 270-day lock program. 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.

Option 1: Low cost with refund

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

Option 2: Middle ground

  • Upfront Fee = .5% point
  • Refunded at closing = zero, no refund
  • Rate add-on = .375%

Option 3: Lowest rate with no refund

  • Upfront Fee = 1.0% point
  • Refunded at closing = zero, no refund
  • Rate add-on = .25%

12-month lock (360 days)

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

Option 1: Lower costs with refund

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

Option 2: Lower costs, no refund, lower rate

  • Upfront Fee = .5% point
  • Refunded at closing = zero, none
  • Rate add-on = .5%

Option 3: Lowest rate but more upfront

  • Upfront Fee = 1% point
  • Refunded at closing = zero, none
  • Rate add-on = .375%

Refund Details

There are instances where a refund of the upfront money will NOT be issued.

Property address cannot change

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

Don’t let the lock expire

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

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

Lock extensions 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. It gets very expensive the farther out the lock is extended.

Currently, the maximum number of days allowed for an extension is 30 days. After 30 days, the rate and all money collected will be forfeited.

Loan is withdrawn

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

Summary

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.