Understanding Commercial Rate Lock Structures
Commercial mortgage interest rates consist of two components: the benchmark index (typically the 5-year or 10-year US Treasury yield, or 30-day SOFR) plus the lender's credit spread (e.g., +185 basis points).
Commercial lenders offer three distinct methods for locking interest rates during the origination process:
1. Floating Rate Until Closing (Closing Day Lock)
The interest rate remains floating throughout underwriting. The final coupon is locked 3 to 5 business days prior to closing based on current market Treasury yields. This eliminates upfront lock fees but exposes the borrower to interest rate volatility during underwriting.
2. Early Treasury Index Rate Lock
The borrower locks the benchmark US Treasury yield at term sheet signing or credit committee approval by posting a refundable 1.0% to 2.0% Rate Lock Deposit. The lender executes a matching hedge in the bond market to fix the coupon.
3. Forward Rate Commitment
Used primarily in ground-up construction, substantial renovation, or pre-leased acquisitions. Life insurance companies and agency lenders lock interest rates 6 to 18 months ahead of building completion for an upfront forward commitment fee (typically 10 to 20 basis points per month of forward lock).