How to Understand the Lock in Period for Your Home Loan

When a lender offers you a rate on your home loan, it is normally good for that day only. Obviously, you will not be closing on your new house that same day, so you have to be concerned about what the rate will be later on.

But banks today frequently offer their customers a lock in period for their loan at the time of application. They understand that there is usually a period of time between when the loan application is made and the loan is closed. And since most people calculate how much mortgage they can afford based the interest rate, they realize people want to maintain that rate. The lock in period is the time during which the potential borrower can obtain a rate for a future closing. This applies to both interest rates and points.

The lock in rate can be fixed at the application point, the processing stage or the approval stage of the home loan.

An example would be if a lender offered a lock in rate for thirty days at 5.5% interest with one point. You then have the right to borrow at 5.5% even if you are not able to close on the mortgage for the next thirty days. This thirty day period is usual, since getting all the paperwork done may take that long. Banks are not likely to give such a guarantee for more than 30 days, with a greater chance of rates increasing, unless the borrower pays a premium.

Keep in mind, however, that a locked in rate may prevent you from taking advantage if interest rates actually decrease, unless you have an agreement that prevents this from happening. You have make sure you negotiate such a benefit in advance.

If your mortgage is not settled during the lock in period, it will expire and your new loan or new lock in period will be at the increased rate. If there haven?t been any significant movements in rates, the lender may be willing to renew.

There are combinations in terms of lock in periods.

Rate is locked, points are locked. In other words, the bank will maintain both the interest rate and number of points for 30 days.

Locked Interest Rate with no locked in Points. The lender may choose to protect himself by setting a fixed base rate for the lock in period, but maintaining the right to change the points to maintain the rate. You may have to pay more points to get the guaranteed rate.

If interest rates are moving a great deal, it is probably a good idea to ask your lender about lock in periods.