Lock Period: What it Means, How it Works

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What Is a Lock Period?

A lock period is a window of time, usually 30 to 90 days, during which a mortgage lender must keep a loan offer open to a borrower. The borrower prepares for closing and the lender processes the loan application.

A mortgage rate lock is an agreement between a lender and a borrower that guarantees an interest rate on the mortgage for the lock period, typically at the prevailing market rate. It protects the borrower from rising interest rates during this time.

Key Takeaways

• A lock period is a specific time frame in which a mortgage lender guarantees an interest rate or other loan terms to a borrower.
• This period is typically 30 to 90 days but can vary based on the lender and borrower’s underwriting.
• A lock period offers protection against rising interest rates while the lender processes the loan application before closing.

How Lock Periods Work

A lock period provides peace of mind to the borrower by protecting against rising interest rates during the loan application process. The length of the lock should align with average approval periods in the local jurisdiction. Rates can fluctuate during this time.

If rates increase during the lock period, the borrower is protected from interest rate risk. Even a minor increase in the prime rate can cost an unprotected borrower thousands of dollars over the loan’s life. For refinancing to avoid foreclosure, the risk is even greater as it could lead to losing a home if the lender perceives that the borrower can no longer afford the loan.

If rates decrease during the lock period, the borrower might have options to benefit from it. A float down provision allows the borrower to secure a lower interest rate. If the lock agreement doesn’t include a float down, the borrower may consider rewriting the loan entirely if it’s cost-effective.

A lock period typically comes with costs. Lenders charge fees for the lock itself and the float down provision. To evaluate options, the borrower needs to assess their exposure to interest rate risk.

Shorter vs Longer Lock Periods

An important consideration for borrowers is the duration of the lock period. Longer lock periods, between 45 and 90 days, offer more protection. However, lenders may not offer as appealing of an interest rate for an extended lock period. If the loan cannot close during this time, the lender may be unwilling to extend a second lock offer at a favorable rate.

Shorter lock periods, from one week to 45 days, typically feature lower guaranteed interest rates and possibly lower fees. Some lenders even charge no fees for lock periods shorter than 60 days. However, if the lender cannot approve the application within the lock period, the borrower once again faces interest rate risk. Extending the lock period may require a fee or lock deposit.

Lock periods involve important variables, and borrowers should be aware of the trade-offs when making changes. In general, it is a valuable tool for borrowers and worth pursuing.

Lock periods involve important variables, and borrowers should be aware of the trade-offs when making changes. In general, it is a valuable tool for borrowers and worth pursuing.