A rate lock is a lender commitment that fixes a commercial loan's interest rate for a set period before closing, protecting the borrower from rate moves while the deal finishes. It converts a quoted rate into a guaranteed one for a defined window. The borrower usually posts a good faith deposit that is forfeited if the lock expires unused.
How Does a Rate Lock Work?
A rate lock works by freezing the loan's note rate on a chosen date so it cannot change before closing, even if benchmark rates move. The lender guarantees the rate for a lock period, and the borrower posts a deposit to secure it. If the loan closes inside the window, the borrower gets the locked rate; if the lock expires first, the rate is lost and the deposit is at risk.
Lock periods vary by loan type. Per Bankrate, conventional locks commonly run 30 to 90 days, extendable in intervals. Agency multifamily loans allow far longer locks: per Fannie Mae, its Streamlined Rate Lock offers terms up to 180 days, and per Freddie Mac, its Early Rate-Lock lets a borrower lock the full note rate months before closing.
Element | What it fixes or costs |
Lock period | The window the rate is guaranteed, commonly 30 to 180 days |
Note rate | The exact interest rate the borrower will pay if closed in time |
Good faith deposit | Cash posted to secure the lock, at risk if the lock expires |
Extension fee | The cost to lengthen a lock past its original expiration |
Why Rate Locks Matter
Rate locks matter because a commercial loan can take weeks to close, and an unlocked rate leaves the borrower exposed to every move in SOFR or Treasury yields during that time. On a $10,000,000 loan, a 0.25% rate move between application and closing changes annual interest by $25,000, which a lock removes as a variable.
The protection is not free, and the deposit creates real downside. Per Fannie Mae, its Streamlined Rate Lock requires a good faith deposit of 2% of the loan amount for a lock up to 90 days and 3% for a lock between 91 and 180 days. The quotable point for an operator: a rate lock trades interest rate risk for execution risk, because the deposit is forfeited if the deal slips past the lock window.
Example
A borrower locks a 6.50% rate on a $10,000,000 agency loan with a 90-day lock and a 2% good faith deposit. The table shows the deposit at stake and the interest impact if the rate had drifted to 6.75% before closing without a lock.
Item | Calculation | Result |
Loan amount | Given | $10,000,000 |
Locked rate | Given | 6.50% |
Good faith deposit (2%) | 2% x $10,000,000 | $200,000 |
Annual interest at locked 6.50% | 6.50% x $10,000,000 | $650,000 |
Annual interest if unlocked at 6.75% | 6.75% x $10,000,000 | $675,000 |
Interest saved by locking | $675,000 minus $650,000 | $25,000 per year |
The lock guarantees 6.50%, or $650,000 a year. Had the rate drifted to 6.75% before closing, unlocked interest would be $675,000, so the lock saves $25,000 a year over the loan's life. The cost of that protection is a $200,000 deposit at risk if the borrower cannot close inside 90 days.
Variations and Edge Cases
Rate locks differ by lender, loan type, and timing, and the terms drive both cost and flexibility. The table below covers the variants a borrower should confirm before committing a deposit.
Variant | Treatment |
Early rate lock | Locks the rate months before closing; agency programs allow this with limited early underwriting |
Float-down option | Lets the borrower take a lower rate if the market falls before closing, usually for a fee |
Lock extension | Extends an expiring lock; per Bankrate, extension fees commonly run 0.25% to 1% of the loan |
Lock expiration | If the lock lapses before closing, the rate is lost and the deposit is typically forfeited |
The most common mistake is locking before the deal is ready to close on schedule. A lock is only as valuable as the borrower's ability to close inside it, so an aggressive lock on a slow-moving transaction can force costly extensions or forfeit the deposit outright.
Rate Lock vs Interest Rate Cap
A rate lock is often confused with an interest rate cap, and both manage rate risk, but they apply at different stages. A rate lock fixes the note rate before closing and expires once the loan closes. An interest rate cap limits how high a floating rate can rise after closing, over the life of the loan.
The practical difference is timing and duration. A rate lock protects the borrower during the closing window only, then disappears; its cost is a deposit tied to closing on time. An interest rate cap protects a floating-rate borrower for years after closing, and its cost is an upfront premium tied to the strike and term. A borrower can use both: a lock to reach closing, and a cap to hedge the rate afterward.
Frequently Asked Questions
What is a rate lock on a commercial loan?A rate lock on a commercial loan is a lender commitment that fixes the note rate for a set period before closing, so the borrower is protected from rate moves while the deal finishes. The borrower usually posts a good faith deposit that is at risk if the lock expires before closing.
How long does a rate lock last?A rate lock commonly lasts 30 to 90 days on conventional loans, per Bankrate, and can be extended in intervals. Agency multifamily programs allow much longer locks: per Fannie Mae, its Streamlined Rate Lock runs up to 180 days, and Freddie Mac's Early Rate-Lock lets borrowers lock months before closing.
What is a rate lock deposit?A rate lock deposit is cash a borrower posts to secure a locked rate, typically forfeited if the lock expires before closing. Per Fannie Mae, its Streamlined Rate Lock requires a good faith deposit of 2% of the loan amount for locks up to 90 days and 3% for locks between 91 and 180 days.
What happens if a rate lock expires?If a rate lock expires before closing, the guaranteed rate is lost and the borrower must reprice at the current market rate, which may be higher. The good faith deposit is typically forfeited. Extending a lock instead costs an extension fee, which per Bankrate commonly runs 0.25% to 1% of the loan amount.
Related Terms
Permanent Loan
CMBS Loan
Interest Rate Cap
Loan to Value Ratio
Debt Service Coverage Ratio