What do you understand about the "lock-in period?'

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ladyvols1 eNotes educator| Certified Educator

A lock-in as described in the Business Dictionary is the time period “which a lender guarantees an interest rate to a borrower. This process is also called a rate-lock or rate commitment. It is a period of time in which the loan is promised to keep a certain interest rate and a certain number of points. This period of time is often held in place while the bank or lender is processing your loan which can be helpful so that if the interest rate goes up during the application process, you are locked-in at the lower rate. This process is under fire right now in the media and there is a movement to do away with this “lock-in”.

"The "quality" structure of interest rates describes the effect of uncertainty about receiving the specified reward. In the face of uncertainty about payments, lenders will demand a higher rate of return or "risk premium." The interest rate to a particular borrower will be the sum of a "risk-free" rate plus the risk premium. Default risk is not simply the failure to pay principal, but is rather a matter of degree."