Rate Lock: A binding agreement that fixes your interest rate for a specified period (typically 30-60 days). Until you lock, you're "floating"—exposed to Treasury movements that can swing your loan proceeds by hundreds of thousands of dollars in a single week.
Why Does the Rate Lock Matter So Much?
The property underwrites. Documentation is clean. You're weeks from closing. Then the Fed speaks, Treasuries spike 50 basis points, and your loan proceeds drop $200,000.
This isn't hypothetical—it's the daily reality of the "Float Period." Your rate isn't fixed until you sign the Rate Lock Agreement. Until then, you're gambling.
How Is Your Rate Calculated?
| Component | What It Is | Who Controls It |
|---|---|---|
| Index (Treasury) | 5-Year, 7-Year, or 10-Year Treasury yield | The market (moves constantly) |
| Spread | Lender's profit margin + risk premium | Your lender (fixed at quote or lock) |
| Your Rate | Index + Spread | Both must be locked |
Typical Rate Components (Current Market)
| Loan Term | Index | Typical Spread | All-In Rate Example |
|---|---|---|---|
| 5-Year Fixed | 5-Year Treasury (~4.25%) | +2.00% - 2.50% | 6.25% - 6.75% |
| 7-Year Fixed | 7-Year Treasury (~4.35%) | +2.00% - 2.50% | 6.35% - 6.85% |
| 10-Year Fixed | 10-Year Treasury (~4.50%) | +1.75% - 2.25% | 6.25% - 6.75% |
The Spread Negotiation: The Treasury is the Treasury—you can't negotiate it. But the Spread? That's where deals are won. A 25 basis point spread reduction on a $2M loan saves $5,000 per year.
What Is the Float Period?
The "Float Period" is the time between loan application and rate lock. During this period—typically 30-45 days—you're exposed to market movements.
| Phase | Duration | Rate Status |
|---|---|---|
| Application | Day 1 | Quoted rate (not locked) |
| Underwriting | Days 1-30 | Floating—exposed to market |
| Rate Lock | Day 30-35 | Locked—protected from market |
| Closing | Day 45-60 | Locked rate applies |
The Float Period Gamble: In volatile markets, the Float Period is dangerous. Treasuries can move 25-50 basis points in a week on Fed announcements, inflation data, or geopolitical events. You have no protection until you lock.
How Do Rate Changes Affect Loan Proceeds?
Most SBL loans are DSCR-constrained. When rates rise, debt service rises, which means you need more NOI to hit the same coverage ratio—or your loan gets cut.
The Proceeds Impact Table
| Rate Change | Impact on $2M Loan | Reality |
|---|---|---|
| +0.25% | ~$50,000 less proceeds | Bad week in the market |
| +0.50% | ~$100,000 less proceeds | Hot inflation print |
| +0.75% | ~$150,000 less proceeds | Fed rate hike surprise |
| +1.00% | ~$200,000 less proceeds | Major market dislocation |
The Math That Kills Deals: On a $150,000 NOI property at 1.25x DSCR, a 50 basis point rate increase reduces your max loan by approximately $80,000-$100,000. If you quoted terms to a seller based on a floating rate, you now have a gap to fill—with your own equity.
What Is an Index Lock vs. Full Rate Lock?
Some lenders offer an Index Lock (also called "Early Rate Lock") as an alternative to floating completely:
| Lock Type | What's Fixed | What Floats | Best For |
|---|---|---|---|
| No Lock (Floating) | Nothing | Index + Spread | Betting rates will fall |
| Index Lock | Treasury component only | Spread | Protect from macro shocks; negotiate spread |
| Full Rate Lock | Index + Spread | Nothing | Maximum certainty |
The Index Lock Strategy: Lock the Treasury early (at application) to protect against Fed announcements and inflation surprises. Let the Spread float while you complete underwriting and negotiate. Lock the Spread once you're sure the deal is closing.
When Should I Lock?
| Market Condition | Strategy | Risk |
|---|---|---|
| Rates rising / volatile | Lock early—Index lock at application | Pay slightly higher spread; miss rate dip |
| Rates falling / stable | Float longer—lock at underwriting completion | Sudden spike wipes out savings |
| Major Fed announcement pending | Lock before—protect from surprise | Lock in current rate; miss potential drop |
| Uncertain economic data | Index lock—split the risk | Spread may widen |
The "I'll Wait for the Dip" Trap: Borrowers who float hoping for lower rates often get caught by sudden spikes. Markets move fast. You can't time the bottom. If the deal works at today's rate, lock it.
What Is the Breakage Fee?
Once you sign the Rate Lock Agreement, you're married to the deal. If you walk away—for any reason—you owe the lender a Breakage Fee.
| Typical Fee | 1% - 2% of loan amount |
| On a $2M Loan | $20,000 - $40,000 |
| When It Applies | Borrower cancels after signing Rate Lock Agreement |
| How It's Structured | Often a deposit paid at lock, forfeited if deal fails |
The Point of No Return: Before you sign the Rate Lock Agreement, you can walk away with no penalty (you may lose application fees and report costs). After you sign? The Breakage Fee applies. Make sure your deal is solid before you lock.
What Triggers Breakage Fees?
| Scenario | Breakage Fee? | Notes |
|---|---|---|
| Borrower cancels (cold feet) | Yes | Full breakage applies |
| Borrower fails to close by lock expiration | Yes (usually) | Unless lender agrees to extension |
| Property fails inspections | Sometimes | May have contingency protection—check docs |
| Lender declines after lock | No | Lender's decision = no borrower penalty |
| Rate lock expires, borrower re-locks | Extension fee | 0.125% - 0.25% per week of extension |
What Is a Rate Lock Extension?
If you can't close before your rate lock expires, you may need an extension:
| Extension Fee | Typically 0.125% - 0.25% of loan per week |
| On a $2M Loan | $2,500 - $5,000 per week |
| Maximum Extensions | Usually 2-4 weeks before re-lock required |
Plan for Delays: Appraisal takes longer. Tenant estoppels are late. Survey finds an encroachment. Build 2 weeks of buffer into your rate lock period. The extension fee is cheaper than re-locking at a higher rate.
How Do I Manage Rate Risk?
Rate Lock Strategy Checklist
- Know Your Timeline: How many days from application to closing? Add 2-week buffer.
- Watch the Calendar: What Fed meetings, jobs reports, or inflation prints fall in your float period?
- Understand Your Constraint: Are you DSCR-constrained? Rate changes hit you harder.
- Ask About Index Lock: Can you lock the Treasury early while spread floats?
- Know the Breakage Terms: What's the fee? What triggers it? Any contingencies?
- Model Multiple Scenarios: What are proceeds at +0.25%, +0.50%, +0.75%?
- Don't Get Greedy: If the deal works at today's rate, lock it.
What Should I Expect in the Rate Lock Agreement?
Key Rate Lock Terms
- Locked Rate: The all-in interest rate (Index + Spread)
- Lock Period: Number of days the rate is guaranteed (30, 45, 60)
- Expiration Date: The specific date by which you must close
- Extension Terms: Cost and availability of extensions
- Breakage Fee: Amount owed if you cancel
- Deposit Required: Often 0.5% - 1% of loan at lock
- Contingencies: Any conditions that void the lock without penalty
The Bottom Line: The Float Period is where fortunes are made and lost. You're betting on market direction every day you don't lock. Know your timeline, watch the calendar, and when the deal works—lock it. The rate you have is better than the rate you're hoping for.