DEFINITION of Servicing Fee
Servicing fee is the percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, collecting and making escrow payments, passing principal and interest payments along to the note holder, etc. Servicing fees generally range from 0.25-0.5% of the of the outstanding mortgage balance each month.
BREAKING DOWN Servicing Fee
Loan servicing is the administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off. Administration of a loan includes verification of mortgage, sending monthly payment statements and collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, overnight shipping, and following up on delinquencies. Loan servicers are compensated by retaining a relatively small percentage of each periodic loan payment known as the servicing fee.
The servicing fee is paid monthly by mortgage borrowers to lenders, and is usually 0.25% to 0.5% of the outstanding mortgage balance. For example, if the outstanding balance on a mortgage is $100,000 and the servicing fee is 0.25%, the servicer is entitled to retain (0.25%/12) x 100,000 = $20.83 of the next period payment before passing the remaining amount to the note holder.
In addition to earning the actual servicing fee, in most cases, mortgage servicers also benefit from being able to invest and earn interest on a borrower's escrow payments as they are collected until they are paid out to taxing authorities, insurance companies, etc. Mortgage servicing rights (MSR) trade in the secondary market much like mortgage-backed securities (MBS).
Servicing fees are generally deducted from a mortgage automatically. However, borrowers need to understand that the cost of securing a mortgage is not only the interest, as servicing fees are also included in the total cost. Furthermore, there are also closing costs associated with taking out a loan. All these factors should be taken into consideration when shopping for a personal or corporate loan.