Late Fees on Mortgage Payments
Late Payment Fees on Mortgages: How They Can Benefit You as a Lender
We previously wrote an article outlining the legal late fee interpretation. Let us expand on this concept and how it can affect you as the lender. As many of you know, private lenders we work with typically do loans at about 12% – 18% yearly interest. It’s necessary to stay competitive with the competition.
Of course, everyone would like to earn higher rates without being on higher-risk loans. One way to do this is through late payment fees. Although you may make around 12% – 18% a year, that is your base rate. Many borrowers may be delinquent on their payments from time to time. This could raise your overall rate of return!
Late payment fees are a necessary part of mortgage lending, and they can significantly impact the lender’s bottom line. This article will explore the concept of late payment fees and how they can be profitable for private lenders.
Late Fees Can Be Profitable
Banks, credit card companies, and other lenders thrive on late fees as that is where they make a good chunk of their profits — for example, U.S. credit card companies hauled in $12 billion in late fees in 2016 alone. The late fees also encourage the borrower to pay on time. Borrowers often do not realize the effect they cause when late on a payment. Thoughts like “Are they in trouble?” or “Is my investment still safe?” crosses everyone’s mind when a payment is delayed. For those feelings of discomfort, late fees are the compensation.
Because you don’t sign the mortgage before they’re computed and added to the loan payback amount, you’ll always get them. Indeed, you could start a foreclosure, but it’s expensive and primarily benefits the lawyer. When it is evident that the borrower cannot make payments or repay the mortgage, foreclosure should be regarded as a “last option.”
Reasons For Late Payment
If they are a week late but can make their monthly payment, borrowers may struggle to pay late fees. The borrower can only afford monthly payments, not late fines. Instead of foreclosing, the lender should add those late penalties to the loan’s principal repayment.
You might ask why most people are late on a payment. There could be a health reason. We have had borrowers become ill for a short duration, only to recover later. But catching up is often very difficult.
Another cause could be that they are in a seasonal industry, and their low season is ending, then they take off during the high season. “I was at the beach with my family,” “I am out of the country,” etc.
Taking on the late fees to the principal amount at the end of the term allows them to continue with their repayment strategy. As long as they make their monthly payments, the fees can accrue to the end of the term giving you a bigger payout. I would re-read the in-depth article on the law and how the debt is calculated again to refresh your memory or perhaps not get a chance to read it as it was sent out some time ago.
The Base Interest Rate vs. Late Fees
Private lenders typically offer interest rates of 12-18% annually to remain competitive. While this rate may be attractive, it is only the base rate. Late payment fees can add to this rate of return and increase the lender’s profits. For instance, if a borrower is delinquent on their payments, the lender can charge a late fee, improving their overall rate of return.
Foreclosure as a Last Resort
While beginning a foreclosure process for late payments may be tempting, it is often costly and time-consuming. Therefore, it should only be considered a last resort when the borrower has no prospects of making payments or repaying the mortgage. Instead of foreclosure, it may be wise to add the late fees to the end of the loan during the repayment of the principal.
Late payment fines benefit private lenders and promote mortgage payments on time. While foreclosure should be a last choice, adding late fees to the loan term helps keep the borrower on track. Private lenders can improve profits and maintain a healthy lending portfolio by knowing late fees’ legal interpretation and calculation.
-Written by Glenn Tellier (Founder of Grupo Gap)
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Frequently Asked Questions
What is a late fee on a mortgage payment?
A late fee is a penalty the lender charges when the borrower does not make a mortgage payment on time.
How much is the typical late fee on a mortgage payment?
The late fee can vary, but it is usually a percentage of the mortgage payment amount, typically 3% to 6%.
Can a lender charge a late fee if the borrower is only a few days late on a payment?
Yes, lenders can typically charge a late fee if the borrower is even one day late on a payment.
Can a lender foreclose on a property if the borrower is late on a payment?
While foreclosure is an option for lenders, it is typically considered a last resort. Lenders often work with borrowers to find alternative solutions, such as adding late fees to the loan’s principal balance.
Can late fees on mortgage payments be negotiated?
It is possible to negotiate late fees with a lender, but it will depend on the specific circumstances and the lender’s policies. Speaking with a mortgage specialist or financial advisor for guidance may be helpful.
Can late fees on mortgage payments affect a borrower’s credit score?
Yes, late fees on mortgage payments can negatively impact a borrower’s credit score, as payment history is a significant factor in credit scoring models.
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