A commitment fee is what a borrower pays a lender to keep a set amount of credit available over an agreed period, whether or not the borrower ever draws the funds. Commitment fees typically run from 0.25% to 1.0% per year, calculated on either the unused portion of the credit line or the full committed amount depending on how the agreement is written. It is, in effect, a reservation charge: the lender promises the money will be there when you need it, and the fee is the price of that promise. The lender earns it because capital held in reserve against your undrawn line cannot be lent to anyone else, and because keeping the facility legally and operationally ready has its own ongoing cost.
How the Fee Is Calculated
The most common structure charges the fee only on the unused portion of the facility. If you have a $100 million revolving credit line and have drawn $40 million, the fee applies to the remaining $60 million. That gives you a direct incentive to right-size the facility, because every dollar of unused capacity has a cost.
The math is simple. Take the unused balance, multiply by the annual rate, and divide by the number of payment periods in a year. On a $60 million unused balance at 0.25% per year with quarterly billing, that works out to roughly $37,500 per quarter ($60,000,000 × 0.0025 ÷ 4). Because the unused balance moves as you draw and repay, most agreements recalculate each period based on the average daily unused balance during the quarter.
A less common variant, sometimes called a facility fee, applies the rate to the entire committed amount regardless of how much you have drawn. You see this on standby arrangements or certain letters of credit where the lender’s obligation is the same whether you use the line or not. In that structure the same $100 million facility at 0.25% costs $250,000 per year no matter what you do.
Payment schedules are almost always quarterly in arrears. You pay at the end of each quarter for fees accrued during that period. A few agreements bill annually or require an upfront lump sum, but quarterly is the market standard.
What Drives the Rate
Where your fee lands within the 0.25% to 1.0% band depends on your credit profile, the size and term of the facility, and broader market conditions. Investment-grade corporate borrowers with strong balance sheets routinely negotiate fees at the low end. Smaller businesses or weaker credits often see rates at 0.50% or higher, particularly on larger or longer facilities.
- Credit rating. Stronger credit means a lower fee. Many agreements include a pricing grid that adjusts the fee automatically if your rating changes.
- Facility size and term. Larger and longer commitments generally carry higher fees because the lender’s capital is tied up for more money and more time.
- Market conditions. When credit markets tighten, fees rise. When credit is loose, competitive pressure pushes them down.
- Expected utilization. A line the lender expects you to draw heavily can carry a lower commitment fee, because the lender will earn interest on the drawn balance. A line likely to sit unused commands more.
Where You’ll See a Commitment Fee
Revolving Credit Facilities
The corporate revolver is the classic home for a commitment fee. Because you can draw, repay, and redraw up to the limit, the lender has to stay ready to fund at any moment, and the fee pays for that constant readiness. Commercial lines of credit for smaller businesses work the same way.
Standby Letters of Credit
Standby letters of credit carry a version of the fee, often called a standby fee or issuance fee. The issuing bank charges it even though the letter of credit only pays out if you default or fail to perform.1SEC. Stand-By Letters of Credit Facility Agreement These fees tend to run higher than revolving credit fees because the exposure is binary: either nothing happens or the full face amount comes due.
Construction Loans and Mortgage Rate Locks
In real estate development, commitment fees on construction loans guarantee funding across the phases of a project. Because draws happen on a schedule over months or years, the lender keeps the undisbursed portion available throughout the build, and the fee applies to that undisbursed balance.
Mortgage rate lock agreements involve a related charge. When a lender locks in a specific interest rate for a set period before closing, it may charge a fee for the guarantee. That fee might be a flat dollar amount, a percentage of the loan, or a fraction of a percentage point added to the locked rate, and longer lock periods generally cost more.2Federal Reserve Board. A Consumer’s Guide to Mortgage Lock-Ins
Ticking Fees in Acquisition Financing
Acquisition financing uses a close cousin called a ticking fee. When a buyer secures committed financing for a merger, there is often a gap of several months between signing and closing while regulatory approvals and other conditions are met. The ticking fee compensates lenders for keeping the money available during that delay. Unlike a standard commitment fee, it usually kicks in only after a waiting period, commonly 90 to 180 days, and then escalates in stages so both sides have a reason to close.
Refundability and Early Termination
Commercial commitment fees are almost always non-refundable once paid. Credit agreements routinely state that the fees are “fully earned when paid and shall not be refundable for any reason whatsoever.”3SEC. Commitment Reduction and Amendment and Restatement Agreement If you terminate the facility early or permanently reduce the commitment, all accrued fees through the termination date come due immediately, and what you have already paid does not come back.
Early termination can bring extra costs too. The borrower is typically responsible for the lender’s reasonable expenses in connection with the facility, including legal fees, documentation costs, and third-party charges tied to setting up or winding down the arrangement.3SEC. Commitment Reduction and Amendment and Restatement Agreement Size and length the facility to what you actually need at signing, because trimming it later saves the ongoing fee but costs you upfront.
Residential mortgage borrowers have more room to bargain. A borrower negotiating a loan commitment can try to secure a refund provision covering situations where the loan fails to close for reasons beyond their control, such as the lender invoking an escape clause or the property failing to appraise. A full refund for willful borrower withdrawal is rare, but partial refund rights are often negotiable.
Accounting Treatment Under GAAP
Under U.S. GAAP, a commitment fee is not booked as immediate income or expense. ASC 310-20, which codified the earlier FASB Statement No. 91, requires deferral and systematic recognition over time.4Financial Accounting Standards Board (FASB). Summary of Statement No. 91 How that plays out depends on what happens to the commitment.
- The commitment is exercised. The fee is recognized over the life of the resulting loan as an adjustment of yield. If you paid a $500,000 fee for a five-year facility you draw on, you take $100,000 into expense each year.
- The commitment expires unused. Any remaining unamortized fee is recognized in full when the commitment expires, clearing the deferred amount from both parties’ books.4Financial Accounting Standards Board (FASB). Summary of Statement No. 91
- Exercise is considered remote. If the lender’s historical experience shows the borrower is unlikely to ever draw, the fee is recognized on a straight-line basis over the commitment period as service fee income rather than a yield adjustment.
For revolving credit facilities specifically, commitment fees are deferred and amortized as an asset over the revolving term. Non-revolving loan commitments work differently: deferred fees there get reclassified as a loan discount when the borrower draws.
Tax Treatment for Borrowers
The IRS treats a commitment fee as the cost of acquiring a property right, specifically the right to borrow. Under Revenue Ruling 81-160, it is analogous to the cost of an option. If you exercise that option by drawing on the loan, the fee becomes part of the cost of acquiring the loan and must be deducted ratably over the loan’s term.5IRS. IRS Legal Memorandum – Commitment Fee Treatment You cannot write it off in full in the year you pay it.
If the commitment expires and you never borrow, the treatment changes. The property right you paid for becomes worthless, and you may claim a loss deduction under Section 165 in the year the commitment expires.5IRS. IRS Legal Memorandum – Commitment Fee Treatment Borrowers routinely miss this. If your credit facility lapsed without ever being drawn and you paid a commitment fee for it, the deduction belongs on the return for the year of expiration.
Timing for accrual-basis taxpayers is governed by the economic performance rules under Section 461(h). You generally cannot deduct an expense until economic performance has occurred, meaning the lender has actually provided the services or availability you are paying for.6Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction A recurring-item exception applies: if the fee meets the all-events test during the tax year and economic performance occurs within 8½ months after year-end, an accrual taxpayer can deduct it in the earlier year if it does so consistently.
Consumer Disclosure Rules on Mortgage Commitment Fees
A commitment fee in a residential mortgage triggers federal disclosure rules. Under Regulation Z, the Truth in Lending Act’s implementing regulation, a commitment fee paid by the borrower is generally treated as a finance charge and must be disclosed as part of the total dollar cost of credit.7eCFR. 12 CFR Part 226 – Truth in Lending, Regulation Z It gets itemized alongside points, loan fees, and similar charges before closing.
For transactions subject to RESPA, the lender must provide good faith estimates of all required disclosures no later than three business days after receiving your written application, and generally cannot collect any fee other than a reasonable credit report fee before providing those estimates.7eCFR. 12 CFR Part 226 – Truth in Lending, Regulation Z That timing rule keeps lenders from collecting a commitment fee before you have had a chance to see the full cost picture and shop around.
Home equity lines carry an additional protection. If the lender changes any disclosed term after you apply, other than index-driven rate fluctuations, you can walk away and receive a refund of all fees paid in connection with the application, which includes any commitment fee.7eCFR. 12 CFR Part 226 – Truth in Lending, Regulation Z
How to Negotiate a Better Commitment Fee
Commitment fees are always negotiable. The rate in the lender’s first draft is a starting point.
Competition is the strongest lever. Term sheets from multiple lenders, with each one aware you are comparing, put direct downward pressure on the fee. Lenders trying to build a broader banking relationship with a growing company often concede on the commitment fee to win the mandate.
Right-sizing matters more than most borrowers realize. If you only need $50 million but signed up for $100 million “just in case,” you are paying a fee on $50 million you will never touch. A smaller facility at a slightly higher interest rate on drawn funds can be cheaper overall once the commitment fee savings on the unused portion are counted.
Push on refund provisions where you can. Delay paying the commitment fee until closing, and secure a refund right if the loan fails to close for any reason other than a voluntary walkaway. If the lender invokes an escape clause, or the transaction falls apart through no fault of the borrower, the fee should come back. The lender will usually deduct its out-of-pocket costs to lawyers and appraisers, which is fair, but the balance is worth fighting for.