Definition
A commitment fee reserves loan terms at a specified rate for a set period. It protects against rate increases while you finalize purchase details. More common in commercial lending, it's occasionally used in residential mortgages as an alternative to rate locks.
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Commitment fees are paid upfront to reserve loan terms and protect against rate increases. The fee is typically 0.25% to 1% of the loan amount and is refundable if the lender fails to close the loan. Residential mortgages typically don't use commitment fees; rate locks are more common.
Pro Tip
Most residential mortgages don't require commitment fees; rate locks are typically free but limit floating options.
Example
A lender charges a 0.5% commitment fee ($1,500 on a $300,000 loan) to lock in a 6% rate for 60 days.