What Are Mortgage Servicing Fees And How Can You Avoid Them?
Victoria Araj5-minute read
January 06, 2023
It would be nice to think that after closing day and finalizing your mortgage terms, you won’t ever pay more than the regular monthly amount for your mortgage. But unfortunately, that’s not always the case. Loan servicers, or the entities who issue mortgage coupons and process your payments, can charge fees that go beyond your standard mortgage payment. If you understand these charges, you’re halfway to avoiding them.
In this informational guide, let’s take a look at the different mortgage servicing fees you could be charged – and how to avoid having to pay 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 late payments.
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.
However, beyond the basic services covered by the servicer’s contract with the mortgage owner, servicers can charge some fees directly to borrowers.
Being aware of the different loan servicing fees and knowing how to avoid them can help you choose the right mortgage for your needs.
Mortgage Fees To Avoid
Up next, we’ll take a look at the three most common mortgage servicing fees you might encounter and how you can avoid them. These common fees are corporate advance fees, mortgage recast fees and late-payment fees.
Corporate Advance Fees
Corporate advance fees are essentially repayments, plus a service fee, to your loan servicer for some type of service-related charges. For example, maybe you send in a monthly payment for less than you owe. Your lender may cover the difference temporarily, but you’ll later receive a bill from your lender for the remaining balance. Your lender covering the difference in the short-term 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 but not all mortgage lenders charge interest on corporate advance fees. 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 applying for a loan.
Avoiding corporate advance fees starts with being diligent about making your monthly payments on time and in full. Double-check how much you owe before sending payments and be sure you’re sending the right amount. You can avoid corporate advance fees entirely by enabling automatic monthly payments from your bank.
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’re 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, but they’ll 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®) may charge $100 – $250 to recast. 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.
Many lenders charge late fees equal to a certain percentage of your mortgage payment if you pay late one month. Most late-payment fees are 3% – 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 $30 – $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 payments.
Be sure you know how much you need to pay each month and also put your mortgage payment due date on your calendar. Take note of any grace period, too, since some lenders will give you up to 2 weeks to make a payment before charging late fees. Fortunately, with automatic payments, you can avoid any risk of late fees.
Mortgage Servicing Fees FAQs
What if I 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 compound 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, establish 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 step for you to take when you’re about to fall behind is to 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.
Always 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 that 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 other servicers goes to the loan servicers who manage those accounts. The account balances are used by the loan servicer to pay property taxes and insurance premiums.
The Bottom Line
Homeowners pay loan servicing fees to lenders in exchange for executing and managing their loan. Some fees may be unavoidable, but knowing what they are can help you steer clear of additional and unnecessary mortgage expenses.
Wondering if you can lower your monthly mortgage payment? Start the refinance process today with Rocket Mortgage and see what your new rate could be.
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