Commitment fees are small charges that are imposed by a lender at the time that a mortgage or other type of loan is extended to an applicant. The fee serves as a sign that the lender is pledging resources to enter into the business arrangement with the borrower. Depending on the current standards and circumstances that apply, the exact amount charged will vary.
When a lender chooses to extend a loan to an applicant, there are a number of ancillary costs that come into play. The lender incurs costs due to the administrative and clerical tasks that are associated with the loan from the time of its issue all the way through to the posting of the final payment. A commitment fee is one of the tools used by the lender to partially defer those costs.
Generally, the fee will be addressed in the commitment letter that is prepared and sent to the borrower. The details will include the terms associated with calculating the fee. Many lenders choose to base the amount on a percentage of the loan commitment.
Depending on the circumstances, the borrower may be required to pay the commitment fee on the front end of the business arrangement. The fee may be charged separately from the loan payments, or it may be subtracted from the first installment. Generally, the commitment letter will outline the payment options available.
In some loan arrangements, the commitment fee works as a mechanism to lock in an agreed upon interest rate that will apply for the duration of the loan cycle. Depending on the exact terms of the loan agreement, the fee may be refunded after the borrower has repaid the balance of the loan according to the terms. The borrower, however, may forfeit a refund for many reasons, such as being late with one or more payments, even if the loan is paid off on time.
Borrowers and lenders can sometimes negotiate the terms of the commitment fee and arrive at a decision that is outside the standard usually employed by the institution. While this is not universally the case, there are lending institutions that have some leeway in deciding whether or not to charge a reduced fee or waive it altogether.