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Mortgage Servicing Rights: What You Need to Know

Mortgage Servicing Rights: What You Need to Know

Buying a home is an exciting step in life. Whether it is your first home, the milestone landmark in your life, or a larger home to allow for a growing family, or a smaller home once the kids are grown and out of the house, the purchase of a new home is made with careful thought and much research. As exciting as the process is, it also can be complex and confusing, a strange maze of unusual words like ‘escrow’ that must be navigated. The better you understand these terms, the easier it is for you to make an informed decision before signing a contract and being locked into agreeing with something you didn’t want.

One aspect of the home purchase that you should be aware of is mortgage servicing rights. Put simply, these are generally the administrative functions of the mortgage, such as collecting monthly payments, setting aside insurance premiums and taxes in escrow, and forwarding payments to the lender. These rights are sold by the original lender to a third party company that specializes in these services. This third party company collects a fee for their services, which is outlined in the contract.

These rights can be bought and sold between third party companies, creating a multi-billion dollar industry. Some larger mortgage businesses will be both lenders and administrators, dealing with both the original loans and the third-party rights to servicing functions.

These third-party companies therefore must compete to provide the most cost-effective, efficient services to lenders, benefiting everyone involved. Mortgage servicing rights experts in these companies analyze the markets, making sure to offer the best deals and services possible.

There are many factors involved in determining the value of mortgage servicing rights, and these companies are experts in compiling those factors and making accurate assessments of value based on those factors. Things like prepayment market forecasts and market assumptions can affect this business, altering the value of the mortgage servicing rights.

The fees that these companies collect are already calculated as a portion of the interest you pay on your mortgage, so there are no extra costs to you in this process. Most lenders are in the business of creating loans, with all of their focus on finding customers in need of a mortgage and helping them find the best mortgage for them. But these lenders are not in the business of administration or servicing of loans. That’s where the third-party companies come in, bridging the gap to deal wtih the administration matters of your mortgage payments.

Even the federal reserve has become involved in this business, purchasing mortgage backed securities. This helps the average consumer, like you, by assisting in the process of keeping rates low.

This process has functioned for years, helping lenders maintain themselves as lenders while allowing experts in the field to deal with the mortgage servicing rights. When you go in for your mortgage loan, you can ask the lender what services they employ for mortgage servicing rights. Keeping yourself informed will help you navigate the complicated path of mortgage in the easiest way possible.

Photo courtesy of cliff1066™.

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