Servicing fees for mortgages: What they are and how to avoid them

After you close on your mortgage, you may have to pay some fees beyond what’s on your Closing Disclosure. The servicing company for your mortgage manages your mortgage payment. They may charge fees as part of that relationship. Servicing fees are related to the management of your mortgage, but many of them can be avoided.

What are mortgage servicers? 

Mortgage servicers handle collecting your mortgage payment. Your servicer is your main point of contact after closing on your home loan. This may or may not be your original lender.

The servicer collects your payment, forwards the principal and interest to the investor in your loan, and maintains any escrow account you may have for taxes and insurance.

The primary way that servicers make money is by keeping a small portion of your monthly principal and interest. But they may make additional money by charging a servicing fee.

What are servicing fees?

Servicing fees are extra charges paid to servicers for additional work related to the processing of your mortgage payment and maintenance of your escrow account, if you have one. There’s also typically a fee for late payments.

This is separate from the fee that mortgage servicing companies receive for managing your mortgage on behalf of the investor. Fees vary among mortgage investors, but the range is anywhere between 0.125% – 0.69% of your principal and interest payment. The borrower doesn’t pay. This is taken out of the amount forwarded to the investor.

You don’t get to pick your servicer because your servicing rights are either retained or sold by your original lender. But your servicer does have to disclose the fees they charge, so understanding how to avoid them can keep more money in your pocket.

Mortgage fees to avoid

Three common servicing fees include corporate advance costs, charges for a mortgage recast, and late payments. We’ll run through when these fees apply and how to avoid them.

Corporate advance fees

Corporate advance fees are repayments of amounts paid by your servicer on your behalf as they maintain your mortgage. A typical example is making a payment that’s less than the amount you owe. Your servicer may cover the remaining balance, so there’s no impact on your credit score, and you’ll be charged for it in the future.

Other examples of corporate advance fees include expenses related to foreclosure and bankruptcy proceedings, such as property preservation.

Escrow covers property taxes and homeowners insurance. If the amount of money in your account is lower than the needed amount to pay for these items, the money is repaid either in a lump sum or over the next year after your next escrow analysis.

You may pay interest on corporate advance fees.

You should know that some servicers charge interest on corporate advance fees. While Rocket Mortgage^® doesn’t, check with your servicing company on its policies.

How to avoid corporate advance fees

To help you avoid these fees, you’re going to want to make full and timely payments. You can set up automatic payments so you don’t have to worry about forgetting to make a payment. Do this through your servicer rather than your bank so that the correct amount is taken out if your taxes and insurance change.

Mortgage recast fees

A mortgage recast involves making a large payment toward the principal of your mortgage and having the loan reamortized to lower your monthly payment while keeping the term the same.

For example, if you have a 30-year mortgage and do a recast 5 years in, your payment is lower based on having the same term with a loan balance lower than your original, based on 5 years of payments to that point.

Mortgage recast vs. refinance

Servicers have specific requirements and fees when it comes to recasting. At Rocket Mortgage:

• You have to have made at least two payments toward your loan, without paying ahead.
• There must be at least $10,000 in reduced principal payments since your loan closed or was last recast.
• There’s a $250 fee.

In certain circumstances, if rates have fallen since you closed on your original mortgage, it may make more sense to refinance rather than recast to lower your payment.

The key question to ask yourself is what the breakeven on a refinance would be compared to what you save monthly, because closing costs average 3% – 6% of the loan amount. You can calculate how long you would have to stay in the home for it to make sense.

Late-payment fees

If you make a payment after the due date on your promissory note, you could be charged a late-payment fee by your servicer. If you make your payment monthly, your due date is usually the first of the month.

From a practical perspective, there’s usually a grace period in your promissory note where you can make your payment without a late fee. It’s often 15 days after the due date, but check your loan documents.

The late fee is often a percentage of the loan amount, based on your state and possibly your loan type. If your late fee is 3% – 5%, a $1,000 payment would incur a late fee of $30 – $50. Late payments beyond 30 days also get reported to credit bureaus.

FAQ

Let’s answer several more questions you may have.

Is there a difference between a mortgage lender and a mortgage servicer?

Yes. A mortgage lender provides the funds for your home. A mortgage servicer manages your payments on that loan. Your mortgage lender may or may not be your long-term servicer.

What if I can’t make a payment because of a financial emergency?

When you realize you’re going to have trouble making your mortgage payment, contact your mortgage servicer as soon as possible so they can qualify you for possible mortgage relief. Rocket Mortgage clients should log into their Rocket Account and navigate to Help > Payment assistance under the Mortgage tab.

Will my deferral or mortgage relief plan hurt my credit score?

There’s usually at least a temporary negative impact on your credit score from mortgage relief options. The exception is after a natural disaster declaration. In any case, it’s much less than the impact of a foreclosure.

What fees should I expect before I start paying my mortgage?

Before making a mortgage payment, there are several costs paid at or before closing on the house. These include the down payment, application fees, credit report, and title work.

Can I recast my FHA loan?

No. Unfortunately, you cannot recast FHA, USDA, or VA loans from the federal government.

The bottom line: Ditch extraneous servicing fees

Mortgage servicers may occasionally charge additional fees beyond your mortgage payment for extra services and late payments. Most of these issues can be avoided with prompt payment or communication with your servicer. However, it's also important to read the documentation they send you regarding the fees they charge.

If you’re looking to lower your payment, we can help you look at refinancing options. Get your application started.