How To Rate Lock & When Should You?

News & Company Updates

Rate Locks

When rates are low, it may work to investors advantage to move quickly. During uncertain times, there is often a spike in volatility and rates can fluctuate very rapidly. This is when you don't want to have a floating rate, because you could end up with a very poor interest rate compared to stabilized market standards. Index locking is a common strategy investors use with lenders to lock in rates to ensure they can sleep at night. Below is Freddie Mac's description of Index Locking for more information:

*Index Lock gives existing borrowers the opportunity to lock the most volatile part of the coupon (the Treasury index) anytime during the quote or underwriting process. Index Lock also includes the ability to hold the quoted spread, which is not subject to market grid movements; however, the spread will be adjusted based on the pricing grid in effect as of the quote date due to changes in the property or the borrower or other transaction-specific terms not fully reflected in the quote.

Following the execution of the Index Lock, the borrower can choose to complete the early rate-lock (ERL) process to lock the spread quickly or follow our standard delivery execution to lock the spread at completion of full underwriting

10 Year Treasury

The 10 Yr Treasury is an important figure to pay attention to in the commercial real estate world. If you are an active investor, this is something you should be watching on an ongoing basis. It all has to do with lending and the interest rate that you can expect on a loan if you are looking to purchase a commercial property. Below is a link that you can use to keep up with where the index is at if you are ever wondering.

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Why Do I Need To Know?

You need to know where the current 10 yr treasury is at because lenders often use this number as a basis for generating interest rates on loans. They typically take the current 10 yr rate and then add a 'spread' on top of it. During volatile times, you want to make sure you pay attention to it as well and stay in close communication with your lender to make sure you don't get stuck with a bad interest rate.

*Basis Point: every 1 basis point is 0.01%, so 100 basis points = 1.00%*

Common Questions

Below are some common questions from Freddie Mac's website that may be helpful information:

What are the benefits of an index lock?

Index Lock allows borrowers to quickly lock the Treasury index at quote or underwriting, mitigating the issue of interest rate volatility. It also creates greater efficiencies for the Lender and their borrower by requiring less documentation to lock than a preliminary underwriting package. With the addition of the ability to hold the quoted spread at Index Lock, it will further mitigate risk and reduce loan coupon volatility. Once the Index Lock Agreement is issued, the borrower needs to Index Lock before the quote expires (five business days from quote issuance).

Since Freddie Mac is locking the index, but not the spread, when will the borrower know their all-in rate?

With the addition of the ability to hold the quoted spread at Index Lock, the borrower will have some indication of the all-in rate at Index Lock; the spread will not be subject to market grid movements but will be adjusted due to new information received on the property, the borrower, or the guarantor or if there are loan document modifications or transaction-specific facts that require additional changes to the quoted spread. If the borrower chooses early rate-lock, they will know their all-in rate after a review and approval of a pre-underwriting package. If the borrower chooses the standard delivery process, they will know their all-in-rate after commitment.

What is the process of locking the treasury index?

If a Lender wishes to lock the Treasury index on behalf of their borrower, they must identify an asset, request a UPB, complete and submit a Loan Submission Template (LST), send it to Production for a quote, and sign and return the Index Lock Application. A preliminary underwriting package is not required to complete the Index Lock. Once you receive a current quote based on the pricing grid in effect on the date of the quote, if you choose an early rate-lock, you will need to deliver the preliminary package within 15 days. If you choose standard delivery, you will need to deliver the full underwriting package within 45 days.

How quickly can a lender lock the treasury index on behalf of the borrower?

A Lender can lock the Treasury index on behalf of the borrower within hours of receipt of a completed LST, if the Lender and borrower return a signed Index Lock application within this timeframe.

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Hayden Harrington // Founder

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