In one sentence
A charge compensating the lender for the cost of unwinding a rate lock or funding arrangement when a loan fails to close as scheduled.
The longer version
When a borrower locks a rate and the loan slips or dies, the lender may have hedged the position, and unwinding that hedge has a cost. The breakage fee passes that cost to the party that caused the miss.
Breakage risk is one more reason closing discipline has a dollar value: a diligence delay that blows the lock window is not just annoying, it is billable.
Common questions
- What is a breakage fee?
- A charge that compensates the lender for the cost of unwinding a rate lock or hedge when a loan does not close or is repaid at an unexpected time.
- Why do lenders charge breakage?
- Because the lender may have hedged the rate it locked. If the loan fails to close, unwinding that hedge can cost money, which the borrower agreed to cover.
- Can breakage be a credit to the borrower?
- Sometimes. If rates move in the borrower's favor, unwinding a hedge can produce a gain, and some agreements share it. Others only charge losses.
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