How to Understand the Lock in Period for Your Mortgage

When you apply for a home loan, you will be given a rate, but that rate is for that day only. Obviously, you will not be closing on your new home that same day, so you have to be concerned about what the rate will be at a later point.

But lenders today often offer their clients a lock in period for their loan at the time of application. They know that the time between deciding to shop for a home and actually finding and closing on it may take some time. They also realize that borrowers don't want to take a risk on loan rates increasing during the period they are looking for their loan. So a lock in period can be negotiated with your lender, which will keep the rate the same for a certain length of time. This applies to both interest rates and points.

Generally, lenders will offer this option at any point: application, during processing, or at approval.

Let us say you are offered a 30 day lock in rate of 5.5% with one point. What this gives you is the privilege to keep that rate, even if you do not close on the loan for another 30 days. This is a fairly common lock in time that lenders offer to attract customers. Banks are not usually willing to give such a guarantee for greater than 30 days, because of the greater chance of rates going up, unless the borrower pays a premium.

Keep in mind, however, that a locked in rate can prevent you from taking advantage if interest rates actually decrease, unless you have a clause that prevents this from occurring. Make sure your lender is willing to use to the reduced rate in case of lower interest rates.

If you don't close on your loan during the lock in period, the guarantee expires, and you will be quoted a new rate at the current rates. If rates have not moved, you may be allowed to extend the lock in period.

There are combinations in terms of lock in periods.

Both rate and points are set. Both interest rate and number of points are fixed.

Locked in rate, however no points locked. The base rate remains the same, but the points may vary. This allows them to charge more points if they want.

In a turbulent interest rate environment, it is extremely wise to opt for a lock in period, and maybe even pay a slightly higher interest rate for a longer period.

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