Commitment fees are small fees that are charged by a lender at the time that a mortgage or other type of loan is extended to an applicant. The commitment 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 of the commitment fee 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 issue all the way through to the posting of the final payment. A commitment fee is one of the devices utilized by the lender to partially defer those costs.

Generally, the commitment fee will be addressed in the commitment letter that is prepared and sent to the lender. The details will include the terms associated with calculating the fee. Many lenders choose to base the amount of the commitment fee 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. This may take the form of paying the fee outside the loan payments, or the commitment fee may be subtracted from the first installment payment. Generally, the commitment letter will outline the options available for paying the commitment fee.

In some loan arrangements, the commitment fee works as a mechanism to lock in an agreed upon rate of interest that will apply for the duration of the loan cycle. Depending on the exact terms of the loan agreement, the amount of the commitment fee may be refunded after the borrower has repaid the balance of the loan according to the terms of the agreement. However, the borrower 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 commitment fee, or waive the fee altogether.