One is an application fee, which is due at the time the application is submitted and is designed to cover the lender's cost of processing the application. The second charge due before closing is a commitment fee , sometimes referred to as a lock-in fee . Ordinarily, this is not an additional charge and the borrower receives a credit for it against other charges at closing. If the borrower walks away from the loan, however, the lender keeps the payment. Because many borrowers would like to pin down what they are going to have to pay, lenders offer protection against the risk that the rates and points will change between the time they apply for a loan and the time the loan is closed.
Locks are costly to lenders.
If interest rates rise, a locked loan will usually close at a loss to the lender, but if rates decline many borrowers will start the process over again with a new lender in order to get the lower rate. Losses to the lender from rising rates, therefore, are not offset by gains from falling rates. Forcing the borrower to pay a commitment fee upfront, however, reduces the probability that the borrower will walk away if rates decline, which reduces the net cost to the lender of providing locks. Unfortunately, the practice of lenders is to quote the rate and points alone, leaving it for the consumer to find out about the origination fee later. This makes the lender charging an origination fee look better to the unwary consumer than the lender who doesn't.