A commitment fee is the amount charged by a lender to keep a specific loan amount available to a borrower. This fee may also be charged for the unused portion of a line of credit. The typical commitment fee begins at 0.25% of the undisbursed loan amount, and can exceed 1.0%. An alternative fee arrangement is for a fixed price to be charged. The lender may require that the fee be paid at the beginning of the prospective loan period. For a line of credit, the fee is usually charged on a periodic basis, based on the average unused balance on the line of credit.
The commitment fee compensates the lender for its risk in keeping a loan available through an agreed-upon period of time (typically one year), despite possible changes in market conditions that might otherwise have resulted in altered loan terms.