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Commitment fee is a term that’s important to understand. Here’s what it means.
What is a commitment fee?
A commitment fee is a fee that a lender may charge a borrower to whom it has agreed to extend credit. Generally charged for lines of credit not yet used, the commitment fee is a way of guaranteeing the bank will keep the funds available.
Financial institutions sometimes charge a commitment fee because they have agreed to keep a line of credit available but can’t charge interest because the borrower hasn’t used it yet. Some lenders charge a flat fee for keeping a line of credit open, while others charge a percentage of the total loan amount.
Banks may charge the commitment fee only once, when the agreement is finalized, or they may charge it periodically, as long as the line of credit remains open. Lenders may charge the commitment fee annually. If they use a percentage instead of a flat rate, the amount may range from 0.25 percent to 1.5 percent of the total loan amount.
Financial institutions may require the commitment fee upfront instead of periodically, and some may refund the commitment fee once the lender completely repays the loan.
Commitment fee example
If a bank agrees to lend you $500,000 but you haven’t taken the money yet, it will likely send you a commitment letter outlining the complete terms and conditions of the loan agreement. If the bank charges a flat fee, it may require you to pay that fee upfront before you receive any of the loan money.
However, the bank may instead charge a percentage of the total loan amount; for example, a $500,000 loan with a 0.25 percent commitment fee would total $1,250.
Use Bankrate’s amortization schedule calculator to find out how much of your monthly payment will go toward principal and interest.
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