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Why Does My Mortgage Keep Getting Sold?

April 24, 2020

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A letter arrives in the mail and tells you your mortgage has been sold. It also informs you to send your monthly payments to a new address. Don’t panic! This happens all the time, and you shouldn’t see many (if any) changes.

“I would say probably 30% to 50% of the time [borrowers are] going to eventually end up mailing their payments somewhere else different from when they first originated it,” says Rocke Andrews, president of the National Association of Mortgage Brokers.

So why does your mortgage get sold—and why can it happen multiple times? Banks and mortgage servicers constantly check the numbers to find a way to make a buck on your big loan. It all takes place behind the scenes, and you find out the result only when you get that aforementioned letter in the mail.

What does a mortgage being sold mean for homeowners?

The short version: When a loan is sold, the terms of that loan don’t change. But where a mortgage-holder submits payment and receives customer service may change as the loan gets sold. And that could affect a few things.

“The level of service that you receive may vary depending upon who the servicer is,” Andrews says. “Certain servicers might offshore a lot of that [work]. So when you would call into servicing you could get a call center in India or over in Asia somewhere and people were less than knowledgeable about the product.”

But service issues that lead to frustration are the exception, not the rule, says Andrews. “Most [consumers] don’t deal with the servicers that much, they just send in a payment and things are happy.”

The new servicer might offer different payment options and may have different fees associated with payment types, so be sure to check any auto payment or bill pay functions you’ve set up.

The basics of mortgage servicing

To understand why mortgages are sold, it’s important to understand some basics.

First, when you take out a mortgage to buy a home, a lender approves your loan and you make payments to a loan servicer. Sometimes, the servicer and the lender are one and the same. More often, they’re not.

The servicer “collects the payment and disburses it out,” Andrews says. “They distribute the payment to the investors, [send] property taxes to the local taxing entity, and [pay] homeowners insurance. They are taking care of all the payments coming in and getting them distributed to the people they belong to.”

Andrews says a small portion of the interest you pay on a loan—often a quarter of a percent—goes to the servicer.

“Typically servicing is a labor-intensive business—there are only five or six servicers [nationwide] that probably handle 75% to 80% of all the mortgages in the United States,” Andrews explains. Major players include Chase, Wells Fargo, Citibank, Freedom, and Mr. Cooper. Some of these companies service the loans they originate.

Servicers can sell your mortgage

Lenders can enter agreements with servicers to purchase batches of loan servicing. Or lenders may shop around for a servicer if they’re carrying too many loans on their books.

Servicers are interested in buying loans in order to sell other products to their new-found customers. Andrews uses an example of a big bank that can then attempt to sell retirement funds, credit cards, or other profitable financial product to customers they had no prior relationship with.

Many lenders originate loans, and then proceed to sell off the servicing or the loan itself. If the servicer changes, the customer must receive a notification. There will be a grace period in case a borrower accidentally sends payment to the wrong place.

Lenders often sell the loans to financiers as a mortgage-backed security for investors or to government-sponsored entities like Fannie Mae, Freddie Mac, and Ginnie Mae.

So why does my mortgage get sold?

Loan servicers are businesses in search of a profit. Andrews says the value of the servicing depends on two main factors:

  • Whether a borrower pays on time or not
  • How long the borrower will be paying

If a servicer receives a quarter percent for servicing a 30-year mortgage, a consumer who pays steadily for the life of the loan is more valuable  than a borrower who opts for a refinance within a few years.

Keep in mind: During a refinance, the new loan pays off the old loan, and new terms are set. So if a servicer was expecting to earn a quarter of a percent over 30 years and the borrower refinances after only five years, the servicer gets the share for five years as opposed to 30.

For example, if you have a $100,000 loan at 4% for 30 years, you’d pay about $70,000 in interest over the life of the loan. However, the lender would need to wait a full 30 years to make that full $70,000. In hopes of a quicker profit, lenders will often sell the loan.

If servicing a loan costs more than the money it brings in, lenders may attempt to sell the servicing of it to lower their costs. The lender may also sell the loan itself to free up money in order to make more loans.

Loan servicers have another consideration in play. They need to pay investors who buy mortgage-backed securities—even if a consumer with a mortgage can’t make payments or is in forbearance.

“The downside to forbearance is the servicing company has to make your payment for you,” Andrews says. “That’s why we’re running into problems.”

With millions of homeowners asking for forbearance, Andrews predicts more mortgages will be sold.

Can I state that I don’t want my mortgage sold?

Somewhere in the terms and conditions of your mortgage paperwork, it likely says your mortgage can be sold. Andrews says there is really no way to keep it from happening.

The trade-off for the odd behind-the-scenes shuffling of your mortgage is a lower interest rate for you—the all-important borrower.

“It’s just part of making the entire mortgage industry safer, more liquid,” Andrews says. “Back in the old days you would go to the bank and make your payment at the bank.” The rates depended on how much money the bank had and the area economy.

But instead of the bygone days of interacting with the local banker, nationwide competition for your borrowing needs has been unlocked.

“By nationalizing the mortgage market, you provide lower rates and better options to the consumer,” says Andrews.

The post Why Does My Mortgage Keep Getting Sold? appeared first on Real Estate News & Insights | realtor.com®.

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

September 18, 2019

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

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Many homeowners with mortgages have considered refinancing at some point or another. Refinancing a mortgage essentially replaces your current mortgage with a new loan. It’s an especially enticing choice for people who want to decrease their interest rate, lower their monthly payments, pay off the loan faster, tap into home equity, or turn an adjustable-rate into a fixed-rate loan.

But hold on. Sherry Graziano, SVP, mortgage transformation officer at SunTrust in Orlando, FL, says that just because rates are at historic lows doesn’t mean that refinancing is the right decision for everyone. “Before beginning conversations with lenders, the homeowner should have a clear financial objective and see refinancing as way to achieve that objective.” 

Once you’ve decided that refinancing is worth exploring, find a mortgage representative who can clarify all the financials and explain all your options. While you’re discussing this, it’s important to ask the right questions—and lots of them.

Ready to refinance your home? Before you jump in and start the refinancing process, here are some questions you should plan to ask your mortgage lender.

1. ‘Does my quote include taxes and insurance?’

When applying for a loan, a lender will provide an estimate that gives a breakdown of all closing costs, the rate, and all other related costs with the loan.

Jeremy Engle, a mortgage lender with Vero Mortgage in Visalia, CA, says the lender’s quote usually includes taxes and insurance. “I ask clients for a current copy of their mortgage statement, and I can pull the figures from that,” he says.

Lenders will typically provide a detailed quote that will break down the new monthly payment, and it should highlight taxes and insurance, according to Graziano. She says homeowners may also want to ask about the associated fees—both the lender’s and other third parties’. “Typical costs may include an appraisal fee, credit report, title insurance, and closing or attorney’s fees,” Graziano says.

2. ‘How much money do I need to bring to closing?’

On average, homeowners can anticipate paying 2% to 3% of the loan amount to refinance a mortgage. So refinancing a $300,000 home loan, for example, could cost $6,000 to $9,000 and would be due at or before closing. Just as with your current home mortgage, the refinancing process will also include closing fees.

Communicate with your lender and ask what you need to bring to the closing table. Closing costs can include a variety of fees—bank, appraisal and attorney fees—for the services and expenses needed to finalize a mortgage.

When it comes to how much to bring to closing, it depends on the loan the borrower is looking to acquire and is unique to each borrower’s financial situation, according to Tarek Hassieb, a licensed real estate broker for Liberty Realty in Hoboken, NJ.

“If they want a lower payment, they’ll bring the appropriate funds to satisfy the payment they feel comfortable with. A borrower can essentially bring zero dollars to closing and add the closing costs to the loan, and bring nothing to the closing table,” says Hassieb.

Graziano says lenders offer different terms and promotions, and it is worth reading through all the documents. 

3. ‘What are my out-of-pocket costs?’

Discuss with your loan officer any additional fees you may be responsible for that are not included in your closing fee estimate. These may be included as separate costs, such as insurance and a property survey. Out-of-pocket costs vary, depending on each buyer’s situation.

“While some homeowners may opt to pay out of pocket for some expenses, many will choose to roll their refinancing costs into the loan,” says Graziano. “Homeowners should be clear about whether or not the lender offers them that option.” 

4. ‘Do I have room to cash out any equity?’

Most lenders prefer to see some equity if you are to qualify for a loan. Usually, the more equity there is in a home, the easier it is to refinance. Experts say at least 20% equity is needed if you don’t want to pay private mortgage insurance. However, even with less, you can still refinance, but the terms may not be as favorable. Hassieb says that since each buyer’s loan may be different, this would be assessed on a case-by-case basis.

5. ‘How long is the term of the loan that you are quoting me?’

When you refinance, you will have a new term and amortization schedule. Each time you refinance your property, the clock is reset for the term length. “The loan would restart to Day One. So consider it a new loan. A borrower can choose a term from 10 years up to 30 years,” says Hassieb.

The cost to refinance a mortgage can vary based on such factors as interest rate, credit score, loan amount, and lender. As a homeowner, if you want to get a better mortgage refinance deal, you should shop around and make lenders compete for your business.

Hassieb says most lenders have an online link to a refinance pre-approval that can help the lender understand the borrowers’ financial situation and help them achieve their financial goals.

The post 5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home appeared first on Real Estate News & Insights | realtor.com®.

What Is a Mortgage? Home Loan Basics Explained

February 14, 2019

What is a mortgage? In a nutshell, a mortgage is a loan that enables you to cover the cost of a home. Since you probably don’t have hundreds of thousands of dollars lying around, a mortgage loan makes it possible to purchase real estate by fronting you the money.

From there, you pay back the loan via monthly payments that last over the course of years or even decades. Consider it the biggest, longest, most life-changing IOU you’ll ever get!

If you’re a newbie to buying real estate, you may be confused by mortgage basics like the following: What do you need to do to persuade a mortgage lender to give you a home loan? And how do you pay it back? Read on for tips on how to find a mortgage and the different types you’ll need to consider.

Mortgage basics: 3 terms you’ll need to know

When you apply for a mortgage loan to buy real estate, here are the main terms you’ll need to know:

  1. Down payment: This is the money you must put down on a house to show a lender you have some skin in the game. You’re best off making a down payment totaling 20% of the price of the home (e.g., $40,000 on a $200,000 home), because this will allow you to avoid an extra fee called private mortgage insurance (PMI). But if you don’t have a chunk of change that large lying around, never fear—certain lenders will accept smaller down payments like 10%, 5%, or even 0% based on your circumstances. Also know that most loans entail your paying upfront closing costs—additional fees that come with processing your home loan.
  2. Principal: This is the amount of money that you are borrowing and must pay back, which is the price of the home minus your down payment (taking the above example, you’d subtract $40,000 from $200,000 to get a principal of $160,000).
  3. Interest rate: Lenders don’t just loan you the money because they’re good guys. They stand to make money off you, too, since you pay them back plus interest—a percentage of the money you borrow. The interest rate you get will vary based on your lender and your own personal circumstances, so it pays to shop around for the best rate.

Mortgages are typically paid back gradually in the form of a monthly mortgage payment, which will be a combination of your paying back your principal plus interest (the one exception to this is an interest-only mortgage, where your monthly payment is interest only for a certain amount of time).

Another fee that might be baked in this mortgage payment is money to pay property taxes and home insurance premiums. These funds get set aside in an escrow account that your lender will use later to pay these bills as they come up.

When to get a mortgage

Believe it or not, you should shop for a mortgage before you start hunting for a house. It might not be as fun as checking out open houses, but it’s way more important.

You’re looking to get a mortgage pre-approval, an in-depth process where a lender will check your credit report, credit score, debt-to-income ratioloan-to-value ratio, and other aspects of your financial profile. This serves two main purposes: First, it will let you know the maximum purchase price of a home you can afford.

Second, and more important, mortgage pre-approval shows home sellers that you are serious about buying a home, which is particularly crucial in a hot housing market, says Chantay Bridges with TruLine Realty in Los Angeles.

Just know that pre-approval is different from pre-qualification. Mortgage pre-qualification entails a basic overview of a borrower’s ability to get a loan without the paperwork to back it up. As such, pre-qualification is an easy and fast way to get a ballpark figure of what you can afford, but it’s no guarantee you’ll get a loan with this lender. So, don’t get your home-buying hopes up unless you’re pre-approved—that’s the real McCoy!

Another easy first step? Before you start browsing online listings or visiting open houses, plug your info into an online home affordability calculator, which will give you an idea of how large your mortgage can be.

Mortgage basics: Where to get a mortgage

Here are the main places you can get a mortgage loan:

  • Banks: This can be a great place to start if you have an institution you work with that already knows you and your finances. That said, banks typically have only a few loan options so it’s smart to talk with your banker, and then compare the programs with a couple more options before settling on one.
  • Nonbank lenders: These companies (e.g., Quicken Loans or PennyMac Financial) are often willing to work with borrowers that banks avoid due to their riskier profile. If you have a poor credit history or some other blemish in your financial past, you may have better luck landing a loan with nonbank lenders, which now provide more than half of all loans.
  • Mortgage brokers: Mortgage brokers are specialists who can help walk you through a much wider variety of options to find a loan that’s right for you. They often work with many different lenders so they can help identify different rates and programs based on your specific situation.

Mortgage basics: An introduction to loan types

There are a surprising variety of mortgage choices available. So how do you figure out which mortgage is right for you? Here are the main types of home loans to consider:

  • Fixed-rate mortgage: A fixed-rate mortgage is just what it sounds like: The interest rate will not vary over the life of the loan. While the interest rate on a fixed-rate loan might be slightly higher overall, a fixed-rate mortgage is a good choice for buyers who like the certainty of knowing their monthly payment will never go up.
  • Adjustable-rate mortgage: An adjustable-rate mortgage (ARM), also called a variable-rate mortgage, will start with a lower interest rate for the first few years, and then that interest rate (and monthly mortgage payment) will “adjust” after a predetermined period (typically five years) based on market indexes. As such, a home buyer enjoys an initially lower mortgage payment. However, this type of loan can feel risky if interest rates rise a lot. Although there is a cap that can prevent too much damage, it’s still smart to check your loan terms and consider your personal situation carefully to determine if an adjustable-rate loan is right for you. Another option? You may be able to refinance an ARM before the rate adjusts. A refinance is where you renegotiate the terms of your loan later on, which could enable you to switch to a fixed-rate mortgage or other type of loan.
  • FHA loan: A Federal Housing Administration loan, typically called an FHA loan, requires a down payment as low as 3.5%. As such, these loans are particularly great for first-time home buyers with meager savings for a down payment or a less than stellar credit score. The catch? These loans require you to pay for mortgage insurance.
  • VA loan: If you’ve served in the United States military, a VA loan from Veterans Affairs can allow a qualifying home buyer to score a mortgage with no money down, no mortgage insurance requirements, and a great mortgage rate in terms of interest. The details: To qualify for a VA loan, you’ll need to have served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves.
  • USDA loan: U.S. Department of Agriculture loans (USDA loans) are designed for families in rural areas. The government finances 100% of the home price (no down payment!) provided you qualify. The mortgage rate in terms of interest may be favorable, too.

How long do home loans last?

Mortgage loans have different “terms,” which means how long a borrower will make monthly payments to whittle the loan amount down to nothing. The two most common terms are 30 years and 15 years. The payment on a 15-year loan will obviously be higher each month you have it, but ultimately a shorter-term loan will save you money in interest, since the life of the loan lasts for a shorter time.

How to shop for a mortgage

Since loans come with different interest rates, time frames, closing costs, and more, it behooves a prospective borrower to shop around, much like you’d compare different laptops before settling on the best one for you.

And, since any interest rate offered by a lender might fluctuate daily—which will have a direct impact on what you ultimately pay—home buyers might also want to do all their research during the same time period as much as possible, says Brandon Haefele, president and CEO of Sacramento-based Catalyst Mortgage and a member of the board of directors of the California Mortgage Bankers Association. That way, you know you’re making a valid comparison.

Working with a qualified (and patient) loan adviser can help you sort out your options. This pro can help you determine which type of loan is best for your situation and walk you through what your payments would be for different types and terms of loans. The loan adviser will also break down the various closing costs that come with each loan.

By understanding what a mortgage is and all the different types available, you can make the choice that’s right for you and your budget.

Angela Colley contributed to this article.

The post What Is a Mortgage? Home Loan Basics Explained appeared first on Real Estate News & Insights | realtor.com®.