In real estate, a lock in period is when the interest rate of a mortgage is locked for a specific amount within a specific period or when an investor cannot sell or exit an asset for a specific timeframe. It is used in different contexts, depending on the situation.
A lock-in period applies when:
- A real estate developer is not allowed to exit a project.
- Financial institutions or banks are not allowed to change the interest rates on a mortgage loan.
- A borrower cannot repay a loan fully without paying a penalty, as with the case of prepayment penalty clause.
This refers to a set period of time when a lender guarantees a specific interest rate. The lock-in period will protect you against an increase in rates within a stipulated time frame. A lock-in usually lasts 15 to 60 days, at which time you must close your loan to keep the mortgage rate you locked.
This is also the time when a lender guarantees a specific combination of points and interest rate. A point refers to a rebate or fee that is equivalent to 1% of the loan amount. A loan amount of $100,000, for example, will have a point that costs $1,000.
If you want to lock a mortgage rate, check the specified date when your loan is expected to close and then work your way backward to determine the right time to lock the rate.
If you need 45 days to close your loan, for instance, ask your lender what the interest rate will be if you lock your mortgage for a 60-day period. When the rate proves favorable, close your loan on the specified date.
Avoid longer lock-in periods because their interest rates are likely higher. Lenders don’t know the interest rates in the near future and hedge the risks by offering higher interests or by charging longer lock-in period fees.