Rate locks, extensions and float-downs in a market that will not sit still

A rate lock is a commitment from the lender to honour a specific rate and price for a specific number of days. It is not a favor and it is not free. Longer locks cost more because the lender is hedging a longer exposure, and that cost is real whether it appears as points or is buried in the rate.

What surprises borrowers is the other half of the contract: what happens when the lock expires, and what happens when the market moves in your favor.

How long, and what it costs

Our current sample grid: a 30-day lock at base pricing, 45 days at 0.125 points, 60 days at 0.250 points and 90 days at 0.500 points. On a $400,000 loan, 0.125 points is $500 and 0.500 points is $2,000.

We default to 45 days on purchases because most Philadelphia contracts settle inside it. New construction and anything with a subject-to-sale contingency goes to 60 or 90 without argument, because an expired lock costs far more than the extra eighth of a point.

Extensions and who pays

Extensions run 0.125 points per seven days, to a maximum of 30 days. On a $400,000 loan that is $500 a week.

Our policy is that if the delay is ours, we pay for the extension. That is written into the lock agreement rather than decided case by case, because a lender who decides case by case will always find a reason the delay was somebody else's. Ask any lender you are comparing whether their extension policy is written down.

A lock with no written extension policy is a lock with a variable price. Ask for the policy before you lock, not when the clock runs out.

Worst-case pricing, and why it exists

If a lock expires and must be re-established, the industry standard is worst-case pricing: you receive the higher of your original locked rate or current market. You never get the benefit of a market that improved during the gap.

That rule exists to stop deliberate lock expiry when rates fall, and it is not negotiable at any lender we know of. It is also the reason we monitor lock calendars daily rather than weekly. An expiry that is spotted on day 41 can be extended for $500. An expiry spotted on day 46 is a repricing.

The float-down

A float-down lets you capture an improving market after you have locked. Ours works like this: if the market improves by 0.250% or more, you may relock once at the new market rate less 0.125%, requested at least ten calendar days before settlement.

The eighth of a point we keep is the cost of the option. It is not charity; it is a hedge unwinding. But on a $400,000 loan a 0.250% improvement is worth roughly $64 a month, and giving up an eighth to capture a quarter is a good trade in anyone's arithmetic.

Not every lender offers one, and among those that do, the terms vary enormously. Some require a 0.500% improvement. Some charge a fee. Some allow it only in the first fifteen days. Read the clause.

Locking before the appraisal

You can lock at application, before the appraisal comes back. Most borrowers do, because the settlement date is the constraint and the appraisal takes nine days.

The exposure is the pricing tier. Loan-level price adjustments step at 60%, 70%, 75%, 80% and 85% loan-to-value. If you locked expecting 75% and the appraisal puts you at 78%, the adjustment changes and the price moves even though the rate was locked.

We state that exposure in writing at lock: here is your rate, here is the loan-to-value it assumes, and here is what happens at each tier if the value lands lower. Nobody enjoys that conversation on day thirty.