Lock Period

What Is a Lock Period?

A lock period refers to a window of time, typically 30 to 90 days, during which a mortgage lender must keep a specific loan offer open to a borrower. During this period, 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 allows the borrower a guaranteed interest rate on the mortgage during the lock period, usually at the prevailing market interest rate. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.

How Lock Periods Work

A lock period offers the borrower peace of mind when it comes to protection from rising interest rates while the lender processes the loan application. Processing times vary by jurisdiction, but the length of the lock should roughly mirror local average approval periods. During that time, rates can rise or fall.

If rates rise during the lock period, the borrower should be protected against interest rate risk, the probability of interest rate fluctuation. A minor upward movement in the prime rate can cost an unprotected borrower thousands of dollars over the life of a loan. In the case of a refinancing to avoid foreclosure, the risk is even greater: An upward tick in rates can mean losing a home if it means that the lender feels that the borrower can no longer afford a loan.

If rates fall during the lock period, the loan lock may offer options beneficial to the borrower. A float down provision allows the borrower to lock in a lower rate. If the lock agreement does not contain a float down, the borrower may decide it is cost effective to rewrite the loan entirely.

The security of a lock period will generally come at a cost. Lenders will charge a fee for both the lock itself and the float down provision. To evaluate their options, the borrower must assess their exposure to interest rate risk.

Shorter vs. Longer Lock Periods

Another important consideration for the borrower is how long a lock period they should seek. Like the loan lock and the float down provision, a longer lock period will likely result in a higher fee than a shorter period.

A longer lock period, between 45 and 90 days, offers greater protection. Generally, though, a lender will not offer as attractive an interest rate over an extended lock period. If the parties are unable to close on the loan during this period, the lender may be unwilling to extend a second lock offer at a rate attractive to the borrower.

A shorter lock period, from one week to 45 days, will generally feature a lower guaranteed interest rate and possibly lower fees. Many lenders will charge no fees at all for a lock period of fewer than 60 days. If the lender is not able to approve the application during the lock period, though, the borrower will once again be exposed to interest rate risk. To extend the lock period, a borrower may choose to pay a fee, or lock deposit.

Lock periods involve several important variables and a borrower should be aware of the trade-offs that occur when changes are made. In general, it is a valuable tool for the borrower and one worth pursuing.