
Loan Lock
A loan lock refers to a lender’s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed-upon period of time. A loan lock refers to a lender’s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed-upon period of time. A loan lock guarantees a borrower that a mortgage lender will, upon closing, provide a loan with a specified interest rate. Rates can go up or down prior to closing, so a loan lock provides the borrower with protection against a rise in interest rates during the lock period. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.
What Is a Loan Lock?
A loan lock refers to a lender’s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed-upon period of time.
How a Loan Lock Works
A loan lock guarantees a borrower that a mortgage lender will, upon closing, provide a loan with a specified interest rate. Typically, lenders offer quotes to prospective borrowers that reflect prevailing interest rates at the time of the offer, rather than at the time of settlement. The quoted rate will also include a lender’s margin. Rates can go up or down prior to closing, so a loan lock provides the borrower with protection against a rise in interest rates during the lock period. A lender will sometimes offer a loan lock as a specific rate plus a number of points. Points represent a fee paid at the origination of a loan to receive a lower interest rate over the loan’s life.
If rates go down, the borrower may have the option to withdraw from the agreement. The probability of such a withdrawal is known as a fallout risk for the lender. The borrower should take great care, however, to ensure that the lock agreement allows for withdrawal.
In some cases where prevailing rates decline during the lock period, the borrower may have the option to take advantage of a float-down provision to lock in a new, lower rate. As with any feature that increases interest-rate risk to the lender, a float-down provision will only be available at an additional cost to the borrower.
Loan locks generally last 30 or 60 days. At a minimum they should cover the period necessary for the lender to process the borrower’s loan application. An example of a short lock period is one that expires shortly after completion of the loan-approval process. In some cases this lock period can be as short as a few days. A borrower can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate.
A loan lock provides the borrower with protection against a rise in interest rates during the lock period.
Loan Lock vs. Loan Commitment
It is worthwhile to distinguish between a loan lock and a loan commitment. A loan commitment can refer to a commercial line of credit, but when used in reference to a mortgage agreement the term refers to a lender’s intention to lend a certain amount at an unspecified point in the future. The commitment may or may not contain a loan lock. Generally, a borrower uses a lender’s commitment to make his or her offer more attractive to the seller of a property in a competitive bidding environment.
Related terms:
Discount Points
Discount points are fees on a mortgage paid up front to the lender, in return for a reduced interest rate over the life of the loan. read more
Fallout Risk
Fallout risk is the risk to a mortgage lender that an individual borrower backs out of a loan prior to closing. read more
Federal Housing Administration (FHA) Loan
A Federal Housing Administration (FHA) loan is a mortgage insured by the FHA that is designed for home borrowers. read more
Fixed-Rate Mortgage
A fixed-rate mortgage is an installment loan that has a fixed interest rate for the entire term of the loan. read more
Lock Period
A lock period is the window of time over which a mortgage lender must keep a specific loan offer open to a borrower. read more
Lock Limit
A lock limit is a specified price movement determined by trading exchanges that if breached results in a lock on the trading instrument. read more
Mortgage Rate Lock
A mortgage rate lock is defined as an unchanging interest rate agreed upon by the lender and borrower during the mortgage process. read more
Mortgage Rate Lock Deposit
A mortgage rate lock deposit is defined as a fee a lender charges a borrower to lock in an interest rate for a certain time period, usually until the mortgage funds. read more
Mortgage Rate Lock Float Down
A mortgage rate lock float down product gives borrowers security and flexibility when rates increase and fall during the lockdown period. read more