After you close on your mortgage, it doesn’t just sit still until it’s paid off. Your loan may stay with your original lender, or it could be sold and serviced by another company — sometimes more than once. When that happens, your loan terms remain the same, but the company handling your payments may change.
Here's what new homeowners should know:
Your loan may be sold or transferred
This is perfectly normal and nothing to be alarmed about. When you close on your loan, your lender has four options.
- Keep the mortgage and service it themselves: The lender retains full control over the loan and handles all payment processing and escrow management.
- Keep the mortgage but sell the servicing rights: Your loan terms stay the same, but another company will manage day-to-day tasks like billing and escrow.
- Keep the servicing rights but sell the mortgage: The lender continues to interact with you, even though the underlying loan is owned by another investor.
- Sell both the mortgage and the servicing rights: A new company owns and services your loan, but your interest rate and repayment terms do not change.
Under the Real Estate Settlement Procedures Act, which is known as RESPA, a written notice from both the current and new servicer must be provided when your loan servicing is transferred. There’s usually a 60-day grace period during which misdirected payments cannot be treated as late or incur fees.
What does it mean if your loan was sold to the so-called secondary market?
Often, your mortgage is sold to an investor. It could be a government-sponsored enterprise such as Fannie Mae or Freddie Mac, or a private investment firm. When a lender sells a mortgage, it's primarily about liquidity and risk management. Holding loans ties up capital, which limits the lender’s ability to issue new mortgages. Your lender may keep the loan in its portfolio or package it into mortgage-backed securities (bundles of loans) that are then sold to investors. You'll still make payments to the company that is servicing the account.
Who handles your monthly payments?
After you close, someone has to manage your loan, which is called servicing. The servicer is the company that:
- Sends your monthly statements
- Collects and processes your payments
- Manages your escrow account to pay property taxes and homeowners insurance on time
Sometimes your original lender does this, but often it transfers servicing rights to another company. This can happen anytime — and even multiple times — over the life of your loan. When it does, you’ll get a notice with the new servicer’s contact details because you’ll start sending payments to them.
Monthly payments may change
Your servicer can’t change your loan terms, but your monthly payment might still increase or decrease. Why?
- If your property taxes or insurance premiums change, the amount held to cover those costs, known as escrow, will be adjusted.
- If you have an adjustable-rate mortgage, or ARM, and don't refinance after the fixed period ends, your interest rate and payment can increase.
Whenever your payment changes, your servicer will send you a letter with the new amount. It’s worth noting that you could also end up overpaying into your escrow account. Servicers must review the account at least once a year. If they find you’ve paid too much, you’ll get a refund check. This often happens after refinancing because the new loan usually includes funds to close out your old escrow account. “Homeowners have several tools to help manage their mortgage after closing and these can vary based on their lender,” Raman Muralidharan, head of mortgage at Citizens Bank, told Homes.com in an interview.“For example, Citizens offers an online loan-management portal where borrowers can view statements, monitor escrow activity and make one-time or recurring payments.”
When do you make the first payment?
Your first payment usually comes about a month after closing, but the exact timing depends on the day you close.
Remember that mortgage payments work backwards. When you pay on the first, you’re paying for the previous month’s interest plus some principal.
For example, if you close your mortgage on June 25, your first payment would be Aug. 1, and the interest would be from the month of July.
If you close on June 4, your first payment would be Aug. 1. This would give you almost 60 days without a payment, offering a bit of wiggle room after paying moving expenses and renovation costs.
No matter when you close, you’ll pay a daily interest charge for the remainder of the month.
In the June 4 example, you’d pay interest for June 5 through June 30 at closing. July’s interest will be part of your regular Aug. 1 payment.
How to figure it out:
- Take your loan amount and multiply by your interest rate.
- Divide that number by 365 to get your daily interest.
- Multiply by the number of days left in the month after closing.
That total is your accrued interest, and it will appear in your closing cost documents. This amount is added to your closing costs.
Pro tip: “Homeowners can also set up automatic monthly payments, which helps ensure payments are made on time and avoids late fees,” Muralidharan said.
“There are also flexible payment options available such as a bi-weekly payments, which reduces principal faster and pays the mortgage off sooner. Each lender varies on what options are available.”
How does paying down your mortgage work?
At the start of your mortgage, most of your monthly payment goes toward interest because your loan balance is high. Interest is calculated on the remaining principal. So early on, the interest portion is large because the principal is higher.
As you pay down the principal, the interest owed each month decreases, so more of your payment goes toward the principal. By the end of the term, almost all of your payment goes toward the remaining principal.
This gradual shift is called amortization. Lenders use a standard formula to set your monthly payment, so the loan is fully paid off by the end of the term.