Relocation Mortgage (Relo): What It Means, How It Works

What Is a Relocation Mortgage (Relo)?

A relocation mortgage (relo) is a type of alternative mortgage product designed explicitly for relocating and transferring employees. Corporations may offer a relocation mortgage as part of the signing or employment package for upper-level employees. A relocation mortgage often helps with the costs of moving, transportation, and temporary housing to make an employee's relocation more comfortable and economical.

Understanding Relocation Mortgages

Relocation mortgages often involve financial contributions by an employer as part of an incentive package. These contributions can include subsidies to cover closing costs, interest rate buydowns, and below-market interest rates.

The mortgage lender may also provide a dedicated staff of home loan consultants trained to address the needs of transferring employees who are buying or selling a home. This added service can result in faster and cheaper loan processing.

Mortgage lenders may offer discounts for relocation mortgage rates, such as a 25 basis point (equivalent to 0.25%) discount or a 0.25% discount on closing costs.

Employees Moving With Relocation Mortgages

Employees willing to relocate for work may move several times over the year, which might make an employer unwilling to help with an employee’s relocation if they anticipate the employee's tenure will be brief. As a result, these employees may be less likely to refinance early in the life of their loans.

Additionally, employer subsidies can lower the borrower's monthly payment and reduce their sensitivity to rate-related refinancing during the period of support, which is usually early in the life of the loan.

If interest rates rise, prepayments tend to slow after the first one or two years because of the natural cycles of relocation among these borrowers. A decline in interest rates may cause the employer to encourage the employee to refinance the loan through forced refinancing clauses.

Investing in Relocation Mortgage Pools

Fannie Mae offers relocation mortgage-backed securities (MBSs). This pool of underlying properties consists entirely of relocation loans. However, relocation loans—along with cooperative share loans and certain buydown loans—are considered special-feature mortgage loans. As special-feature loans, there are limits on the number of properties that may be included in the eligible pools.

Relocation loans also may be included in other pools. If a fixed-rate pool contains more than 10% relocation loans, the pool prefix will identify the pool as a relocation loan pool, and the pool statistics portion of the prospectus supplement will show the percentage of relocation loans in the pool.

Any mortgage-backed security pool carries the risk of buyer loan prepayment. The ability to predict this risk is of significant value to traders. Relo mortgages tend to have a more predictable prepayment characteristic, which allows relo mortgage-backed securities to trade at a premium. Relocation mortgages have more predictable prepayment risk characteristics than non-relo mortgages.

Additionally, relo mortgage-backed securities may prepay faster than similar conventional products in most interest rate environments and may also protect an investor in rising interest rate environments.

The Bottom Line

Moving can be a major expense, but many corporations work with a lender to offer relocation mortgages as an incentive to their employees. If you want to take advantage of a relocation mortgage, speak with your employer prior to signing an employment contract to see if it might be included in your compensation package.