What Is Mortgage Commitment Fee?: Tips To Secure Your Finance

About Mortgage Commitment Fees

When you take a loan from any financial institution, you have to pay multiple fees to acquire that loan. 

Most of the fees charged to acquire a loan are pertaining to service; however, the commitment fee is a little different. 

In this post, we will understand what is mortgage commitment fee in detail.

What Is A Commitment Fee?

A commitment fee is a fee that a lender or a bank will charge for providing a promise that they will lend money in the future. 

This fee can be charged on multiple types of loans, such as residential mortgages, commercial mortgages, or small business loans. 

If an individual is taking out a mortgage, he or she may be asked to pay a mortgage commitment fee. You need to know how much it will cost you, and if you can get a refund.

Lenders may charge a mortgage commitment fee for processing the loan and vouch for the availability of funds to borrow in the future. 

The amount of the fee is usually equal to a percentage of the total borrowed amount. For example, if the lender is charging 0.25% as a commitment fee on the principal amount of $200,000, the fee will be $500.

While these fees are not charged on every type of loan, they are very to be charged on mortgages. 

This is because it may take a long time for the mortgage loan to close from the day of approval, and both the lender and the borrower want to make sure the loan is disbursed. 

Borrowers often apply for a mortgage early in the home buying process. As this process takes place well in advance, a borrower may want to be sure that the lender will provide the mortgage when it is finally time to close and transfer home ownership. 

The borrower can pay this fee to get an assurance from the lender that the funds will be available in the future at the time of closing.

How Do Commitment Fees Work?

By law, the lenders have to disclose any fees including the commitment fee to the borrower before the closing. 

Usually, the lenders will provide a mortgage commitment letter mentioning the amount of future funding they have agreed to provide and how much would be the commitment fee charged on the transaction.

Depending on the lender that you work with, this fee may be paid at different points in the mortgage acquiring process. 

The borrower can pay this fee when he or she signs the initial application, at the time when the lender approves funding the loan; or when the mortgage amount is being disbursed. 

Most states have specific regulations on these fees; however, there are also some states where the lenders provide a refund of the commitment fees if the specific conditions are not met.

How Are Commitment Fees Calculated?

The borrower can negotiate this fee with the lender in case of a lump sum loan like a mortgage. 

The lender can charge a lump sum amount or a percentage of the loan amount to the borrower which could be anywhere between 0.25% to 1% of the total loan amount.

For an open line of credit, a formula is used to calculate the average amount of credit available on a regular, often quarterly, basis. 

The commission is then calculated by multiplying the unused amount by the agreed commitment fee percentage.

For Example, if the borrower takes a line of credit of $15,000 with a 0.5% of commitment rate, the borrower will pay $75 for the first year as a commitment fee. 

If in the first year borrower uses $5000 and the unused balance is $10,000, the borrower will pay $50 as a commitment fee.

Conclusion

Though the commitment fee is one way to secure finance in the future, it is advised to check if it is required in your mortgage acquiring process. 

Get quotes from multiple lenders to understand which lender is providing the lowest commitment fee so that you can make an informed decision and save money.

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