What is a Commitment Fee?
A commitment fee is usually defined as a flat charge or a predetermined percentage of the loan amount that has not yet been released. A commitment fee is charged by the lender as compensation for keeping a line of credit open or guaranteeing a loan at a future date. The borrower pays the charge in exchange for the guarantee that the lender would provide the money at the agreed-upon future date and at the agreed-upon interest rate, regardless of financial or credit market conditions.
Commitment Fee Definition
A commitment fee is a word used in banking to denote a price charged by a lender to a borrower in exchange for the lender’s promise to lend. Commitment costs are usually linked with unused credit lines or loans that have not yet been issued.
Because it has set aside cash for the borrower and cannot yet charge interest, the lender is rewarded for giving access to a possible loan through a commitment fee.
How do you calculate a Commitment Fee?
The commitment fee is agreed between the lender and the borrower in the case of a one-time loan. A flat fee, such as $1,000, or a percentage of the loan amount, such as 1%, might be charged.
On a regular basis, usually quarterly, a formula is used to compute the average available amount of credit for an open line of credit. The charge is then computed by multiplying the average unused commitment by the agreed-upon commitment fee rate, and then multiplying the result by the number of days in the reference period.
What Is A Mortgage Commitment Letter?
A mortgage commitment letter is a letter from your lender confirming that you have been authorized for the loan. After an applicant successfully completes the preapproval procedure, the lender issues a mortgage commitment letter. The letter informs the application of the expected size of the mortgage that the lender would grant, and the applicant can use the letter to demonstrate to real estate brokers and sellers that they are creditworthy and serious house buyers. In reality, most sellers would not entertain a non pre approved buyer’s offer.
What’s the difference between a Commitment Fee & Interest?
A commitment fee is legally distinct from interest, despite the fact that the two are frequently confused. A commitment fee is determined on the amount of the loan that has not yet been repaid, whereas interest charges are computed by applying an interest rate to the amount of the loan that has been issued but not yet returned.
Interest is imposed and paid on a regular basis. A commitment charge, on the other hand, is usually paid at the end of the financing transaction as a one-time cost. A lender may levy an additional commitment fee when credit facilities are renewed. A monthly commitment fee on the unused fraction of the available money may be imposed on open lines of credit.
If you have any other questions regarding Commitment Fees, contact the mortgage experts at Mortgage Rates Today!
Last Updated on 05/25/2022 by Mark Verhoeven
Financial Consultant and Author