Mortgage companies lend money to credit worthy borrowers to purchase homes. In addition to the interest charged on the loan amount, the lender charges certain fees up front when the loan originates. These fees are generally lumped together in “closing costs” paid by borrowers on the date the loan closes. The mortgage commitment fee is generally a closing cost, but may not always be a necessary expense.
Function
Lending companies define the mortgage commitment fee differently. Before deciding on your lender, review a complete explanation of their specific terms. Generally, you can pay this fee in return for the lender making a written promise to fund the loan. Some lenders may consider the commitment money as a more general fee for processing the loan and paying for the underwriting process. Other lenders accept this fee on the condition to keep a line of credit open for future use.
Points
Mortgage points are another type of fee paid by the borrower to lock in a lower interest rate. Depending on how a specific lender handles points, the commitment fee may serve as points paid. In this situation, the commitment lies in the terms of the interest rate on the loan. Generally, this can take place when the commitment fee charged equals a percentage of the loan amount rather than a flat rate.
Closing Costs
In addition to commitment fees, mortgage companies can apply various other costs. Most commonly are loan origination charges, underwriting fees, document preparation costs, and appraisal fees. Additionally, lenders generally require borrowers to pay application fees and a fee to run their credit report. These fees pay for the expenses on the application processing and final determination of loan approval. Many functions take place behind the scenes from the time of a loan application until the lender funds the loan.
Considerations
It may be possible to negotiate closing costs with a lender. However, each situation is unique and lenders do not all operate the same way. It is important for borrowers to consider how the upfront charges will offset later costs. For example, paying a commitment fee in the form of points to lower the interest rate may be a wise choice if the borrower intends to remain in the home for an extended period.