What is a mortgage service release premium and who pays for it?
A small portion of your mortgage rate (typically .250% to .375%) goes to the company that services your loan. The company that services your mortgage collects the monthly payment, makes sure you pay your property taxes and homeowners insurance on time, answers any questions you have about your loan 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 and contact if issues arise with your loan.
In some cases lenders 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 pays the service release premium and receives the servicing revenue for that mortgage until the loan is paid off or the rights are sold to a different servicer.
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, depending on when the rights are sold and other loan terms including the mortgage rate and program. For example, for a $100,000 mortgage, the service release premium is approximately $1,250 to $1,750. Because the service release premium is a percentage of your loan, the higher your mortgage amount, the higher the premium.
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. On the other hand, the lower your mortgage rate relative to current market interest rates when you obtained your loan, the lower the premium. Despite this dynamic, because the borrower does not directly pay the service release premium, lenders typically will not disclose the figure to borrowers.
Please note that selling a mortgage or servicing rights is done without the borrower's knowledge or permission and you usually only learn that your loan has been sold when your new servicer contacts you. Additionally, you are not required to pay any additional fees when your mortgage or servicing rights are sold even though the lender pays the service release premium when your loan is transferred.
In short, as long as you continue to make monthly payment on time to the correct servicer, your mortgage being sold or the servicing rights being transferred should have minimal impact on you. Your mortgage rate, monthly payment and other loan terms do not change when your loan or servicing rights are sold.
Finally, now that you understand how a mortgage service release premium works, you also understand how lenders make money off of "no cost" mortgages. The answer is that the lender sells the mortgage and collects the service release premium. Because "no cost" mortgages typically have higher mortgage rates, the lender receives a higher service release premium when it sells the loan. This is why "no cost" mortgages are good for lenders but not always for borrowers.
Sources
“Mortgage Servicing Rules.” CFPB. Consumer Financial Protection Bureau, 2018. Web.
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