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What is Mortgage Service Release Premium and Who Pays It?

What is a Mortgage Service Release Premium and Who Pays for It?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

A small portion of your interest rate (typically .250% to .375%) goes to the company that services your mortgage.  The company that services your mortgage collects the monthly payment, make sure you pay your property taxes and homeowners insurance on time and manages the overall relationship with the borrower. From the borrower's standpoint, your loan servicer is the company you make your mortgage payment to

In some cases a lender will sell the right to service a mortgage (and usually the mortgage itself) to another company. The lender that sells the servicing rights to a mortgage receives a fee called a service release premium.  The lender that sells the servicing rights receives a fee because that lender is foregoing the servicing revenue from that mortgage as the borrower makes his or her monthly payments going forward.  The lender that acquires the servicing rights and pays the service release premium will receive the servicing revenue from that mortgage going forward

The service release premium is a one-time fee paid to the lender that sells the servicing rights and is typically 1.25% to 1.75% of the loan amount.  For example, for a $100,000 mortgage, the service release premium would be $1,250 to $1,750

The lender that acquires the servicing rights to a mortgage pays the service release premium.  It is important to emphasize that the borrower does not pay the service release premium.  Mortgages with higher interest rates and fees, however, typically have higher service release premiums so in some ways the borrower indirectly pays for it.  Despite this, because the borrower does not directly pay the service release premium lenders typically will not disclose the figure to borrowers

Additionally, borrowers may wonder how lenders that offer "no cost" mortgages make any money and the answer is by selling the mortgage and collecting the service release premium.  Because "no cost" mortgages typically have higher interest rates the lender receives higher service release premiums when it sells those mortgages 

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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