How To Avoid Mortgage Loan Servicing Fees
Victoria Araj4-minute read
May 18, 2022
It would be nice to think that after closing day, you might think you no longer need to worry about a change in the monthly amount you pay for your mortgage based on your contract. Unfortunately, that's not always true. Loan servicers, or the entities who issue mortgage coupons and process your payments, you can charge their own fees. If you understand the charges, you're halfway to avoiding them.
What Are Mortgage Loan Servicing Fees?
Loan servicers charge mortgage servicing fees to process your loan or mortgage paperwork. In addition, they’ll charge you for any services not considered routine or as a penalty for lateness.
Fees Paid By The Mortgage Owner
After your loan is closed, mortgage loans move into the servicing phase during which your monthly payment is collected until the loan is paid off. It's the responsibility of the servicer to forward principal and interest payments to the investor in the loan, usually someone in the bond market.
A portion of your mortgage payment, generally around 0.25%, is withheld from your monthly mortgage payment by the mortgage servicing company that processes your payments and statements. Because it's just a portion of the payment held back from the mortgage investor, you don't pay any additional fees.
Fees Paid By Borrower
However, beyond the basic services covered by the servicer’s contract with the mortgage owner, servicers can charge some fees directly to the borrowers. We’ll take a look at the three most common loan servicing fees you might encounter – corporate advance fees, mortgage recast fees and late payment fees – and how you can avoid them.
What Are Corporate Advance Fees?
Corporate advance fees are essentially repayments, plus a service fee, to your loan servicer because they covered some type of service-related charges. For example, let’s say you send in a monthly payment for less than what you owe. Your lender may cover the difference, but later you'll receive a bill from your lender so you can cover what you owe. This is beneficial for you because a late payment can negatively affect your credit score.
Corporate advance fees don’t include charges for expenses that come out of your escrow account. For example, property taxes and homeowners insurance aren’t corporate advance fees. However, you may encounter corporate advance fees if you request an overnight document delivery.
Some mortgage lenders charge interest on corporate advance fees and others don’t. For example, Rocket Mortgage® doesn’t add interest to any corporate advance fees you accumulate. This can save you money over time, so make sure you know your lender’s interest rates before you apply for a loan.
Avoiding corporate advance fees starts with being diligent regarding your monthly payments. Double-check how much you owe before you send funds and be sure you’re sending the right amount. You can also avoid these fees entirely by enabling automatic monthly payments from your bank.
What Are Mortgage Recast Fees?
When you recast your mortgage, you make a large payment toward your loan’s principal balance. Your lender then recalculates your monthly payment so that your monthly payment decreases, while the loan term remains unchanged. In other words, if you are 5 years into a 30-year fixed-rate mortgage, and you do a mortgage recast, you’ll still have 25 years’ worth of payments ahead of you, but they will be lower than before the recast.
Not all lenders offer a recast, and among those that do, some lenders charge up to $4,000 for it. Others (like Rocket Mortgage) only charge $250 to recast. In order to move forward with a recast, you might need a minimum (usually $5,000) to apply toward a principal reduction.
Let’s say your lender will charge you thousands to recast. You may want to consider refinancing your loan instead. When you refinance, your lender pays off your old loan and issues you a new loan with terms that are better for you. Refinancing can often save you money and allow you to change your monthly payment compared to the cost of a recast. You may even have the option to roll your closing costs into the principal balance of your loan with a no-closing-cost refinance.
What Are Late Payment Fees?
Late fees: You know them and you hate them. Many lenders charge late fees equal to a certain percentage of your mortgage payment if you pay late one month. Most late payment fees range from 4% – 6% of your total monthly payment.
For example, if you pay $1,000 to your lender every month and you miss a payment, your lender might charge you a $40 – $60 late fee. You’ll usually incur this fee every time you miss a payment, so it’s financially beneficial to stay on top of your loan.
Be sure that you know how much you need to pay each month and mark your mortgage payment due date down on your calendar. Also, take note of any grace period, as some lenders will give you up to 2 weeks to make a payment before charging late fees. Fortunately, with automatic payments, you can avoid late fees altogether.
Mortgage Servicing Fees FAQs
What If I Simply Can’t Make A Payment Because Of A Financial Emergency?
It’s easy to fall behind on your payments if you run into a financial emergency. This can lead to a series of missed payments and compounding loan servicing late fees. It can be especially easy to fall into debt if you need to borrow money to pay off what you owe. For the best chance of avoiding late fees altogether, make sure you have an emergency savings account before you apply for a mortgage. Most experts recommend having at least 3 months of living expenses in your emergency fund.
The best thing to do when you’re about to fall behind is contact your lender. Explain your financial hardship. Your lender might be able to waive your late fee, especially if you have a long history of on-time payments. Or you may be able to work out a repayment plan or deferral that prevents you from defaulting on your mortgage.
Make sure that you speak with your servicer about how any relief option will impact your credit. Unless it's a special situation like a natural disaster, lenders are typically required to report any payment arrangements don't reflect the payment due under the contract. Obviously, staying in your home can be worth any temporary credit hit, but if you know about the credit implications in advance, you can more effectively deal with them.
Can I Recast My FHA Loan?
Do Loan Servicers Get Paid In Other Ways?
Yes, loan servicers do get paid in other ways. Although escrow accounts at Rocket Mortgage® are non-interest-bearing, interest on escrow accounts managed by others servicers go to loan servicers who manage those accounts. The account balances are used by the loan servicer to pay property taxes and insurance premiums.
Learn More About Mortgage Servicing
Homeowners pay loan servicing fees to lenders in exchange for executing and managing their loan. Some may be unavoidable, but knowing what they are can help you steer clear of additional and unnecessary mortgage expenses. Learn more about mortgage servicing in our Learning Center.
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