For the most part financial institution don't service loans anymore or even plan too. They keep some in a portfolio for accounting reasons but the vast majority are sold.
How it works:
Your loan is assigned a score based upon rate, market direction, your likelyhood of default, etc. That loan is then sold to someone at an agreed rate.
e.g.
- A bank makes a loan for 250K.
- You have good credit and rates are expected to only go up.
- It is likely that your loan will be sold to someone for more 250K (the bank makes money on fees and the investor expects to be able to collect for a while)
e.g. 2
- A bank makes a loan for 250K
- You have mediocre credit and rates are expected to go down making a refi likely
- Your loan is likely sold for less than 250K (the bank makes their money on fees and calls it a day the investor is "gambling" on how long you make payments before refinancing")
For the most part financial institution don't service loans anymore or even plan too. They keep some in a portfolio for accounting reasons but the vast majority are sold.
**How it works:**
Your loan is assigned a score based upon rate, market direction, your likelyhood of default, etc. That loan is then sold to someone at an agreed rate.
e.g.
- A bank makes a loan for 250K.
- You have good credit and rates are expected to only go up.
- It is likely that your loan will be sold to someone for more 250K (the bank makes money on fees and the investor expects to be able to collect for a while)
e.g. 2
- A bank makes a loan for 250K
- You have mediocre credit and rates are expected to go down making a refi likely
- Your loan is likely sold for less than 250K (the bank makes their money on fees and calls it a day the investor is "gambling" on how long you make payments before refinancing")
(post is archived)