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What is a Commitment Fee?
Malcolm Tatum
Malcolm Tatum
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.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
Learn more...
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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![Commitment fees can lock in interest rates for loans.]()
By: goodluzCommitment fees can lock in interest rates for loans.
Discussion Comments
I paid a lot of money to a finance lender for a property that I never ended up going ahead with, but she has never to this day offered my money back.
I went for another property, and gave her a fee to source out a loan for me, but after many months and promises, again, she did not get the loan, but one of her contacts did get it for me. She passed some of my money to him, but is now asking for several thousands of dollars from me. I never had anything in writing from her, so I'm assuming she is nothing short of a charlatan. What are my rights with this person, as I expect she could be trouble?
I was confused about this earlier, but I think I finally understand.
A loan agreement is made and a commitment fee is paid but this doesn't mean that the borrower is obligated to borrow that money. The agreement simply means that the lender is willing to lend money. When the borrower notifies the lender that they are going to borrow a specific amount, the obligation begins.
This means that it would be foolish for me to make the agreement and pay the commitment fee unless I'm hundred percent sure that I am going to borrow money from that lender.
Got it! Thanks for the info!
Some people don't realize this, but the lender is actually required to give you all the necessary details about the fee and the payment process before any agreement. This includes of course, the amount of the fee, but also the expiration date for the commitment, the interest rate and payment schedule.
You should also make sure that there is a statement in the agreement that prevents the terms of the commitment from being changed before it expires.
A commitment fee may also be required for some services or purchases, which may also be called a down payment. This is basically a fee that the buyer will have to forget about if they change their mind about purchasing a service or property.
For example, if you decide to buy a house and pay a commitment fee to the owner, the owner will no longer advertise the house and might take some other actions thinking that the house is sold. If you change your mind about buying, the house owner will keep that fee. It's a way of protecting owner's rights. It's also a way of making sure that a buyer is approaching with genuine interest and an intention to buy.
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