A lock period is a window of time, usually between 30 and 60 days, when a mortgage lender must keep a specific loan offer open to a borrower. Usually, during this period, the borrower prepares for closing and the lender processes the loan application. This period offers the borrower peace of mind and protection from any rate changes while the lender processes the application.
If rates do rise during a lock period, the borrower should be protected against interest rate risk. On the flip side, if rates fall during a lock period, the loan lock may offer options beneficial to the borrower. For example, a float-down provision allows the borrower to lock in a lower rate, and many lenders offer the option to rewrite the loan entirely in the case of an interest rate drop. While a lock is important for the borrower, it will also come at a cost. Lenders will often charge a fee for both the lock itself and the float-down provision, but these fees can be worth it if there is the chance of an interest rate increase.
Another consideration for the borrower is how long a lock period they should ask for. A longer lock period, anything longer than 45 days, will have a higher fee but will result in more protection. A shorter lock period, from 7 to 45 days, will generally feature a lower guaranteed interest rate and lower fees. In fact, many lenders will not charge fees for a lock period of less than 60 days. However, the problem with short lock periods is that if the lender is not able to approve the application during the lock period, the borrower will be exposed to interest rate risk.
While there are a lot of variables to consider when applying for a lock period, it is generally regarded as a valuable tool that a borrower should heavily consider pursuing. With it, they can protect themselves from risk and rest easy knowing the terms of their loan are more or less set in stone, and there will be no surprise fees when it comes time to actually close.