Question

what is a commitment fee and how does it affect the interest rate on a line of credit ?

Answer 1

The commitment fee is a fee which is levied by a creditor on a borrower for future or unused credit. For example in the case of mortgage, the lender does not disburse the full credit amount at one go to the builder. In most of the cases, the disbursement of the loan is linked to the project completion process. Usually, the borrower needs to pay a fee for accessing the loan in future from the lender known as the commitment fee.

This commitment fee does not really have any impact on the interest rate of the line of credit. The interest rate is applied to the amount that has been disbursed while the commitment fee is applied to the amount that is yet to be disbursed. The commitment fee can be a flat amount like $1000 or a percentage of the loan amount like 1%. So the commitment fee has no impact on the interest rates.