What’s Wrong With Paying Late Fees?

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V.I.P. Trust Deed Company

Q:  I have owned my home for many years and have recently tried to refinance my old mortgage to obtain extra money for personal use. Though my credit is good, I was turned down by the mortgage company because of “”excessive late fees.” For years I have always tried to pay my mortgage payment within 30 days of a due date, with only one or two exceptions. In every case, I have included the late fee asked for on my payment stub and have never had any problem with my existing lender. The late fee problem is the only reason for the rejection of my loan. Why would a lender care if I was never really late and always paid the late fee?

A:  In previous columns I have stated that most lenders don’t keep your loan. When your loan is consummated, it is gathered with dozens or hundreds of other loans and resold on the “secondary market.” The lender is, in fact, selling a bushel basket full of loans. When a farmer sells a bushel of apples or oranges they need to be the same, i.e. Macintosh apples or navel oranges, of equal size and ripeness. In the case of home loans, the bushel basket needs to be full of single family/1-4 unit owner occupied loans. The borrower must meet specific credit guidelines, including not more than a certain number of “lates” in the last 12 months. Once in a while a loan with lates can be accepted with a letter of explanation, but many lates will probably not be accepted, as “one rotten apple can spoil the barrel.”

If you are planning to buy a new house or refinance your existing loan, pay particular attention to this advice. Make certain that your credit is good and that at least the last 12 payments have been paid on time. “On time” means before a late fee is due. If you have so-so credit or a series of lates, a lender may still accept you but not resell your loan in the bushel basket.

The loan offered you, however, will probably have an interest rate or points higher than the loan that would have been offered you in the first place. Though I am aware that many payers get “a few weeks behind” and can’t seem to catch up, there are certainly other, smarter ways to solve this problem.

Let’s assume, for example, that your monthly payment is $1,000 per month. A late fee of $50 is due on any payment past the 15th of the month. You have paid seven payments late out of 12, and have paid $350 in late fees. If, as you indicated, you pay within 30 days, you have actually paid $50 each time you were late just to “borrow $1,000” for two weeks. Though this only represents 5%, it represents 5% for, theoretically, a 14 day loan. This actually represents an interest rate of approximately 129% for your 14 day loan. Not only have you paid this once in the above example, but seven times. A better solution would be to borrow an extra $1,000 on your credit card, even at 18%, i.e. $180. Not only would this be less than the $350 you have already paid in late fees, it would have eliminated your problem. An even better solution, if possible, would be to borrow the money from your parents at 10%, i.e. $100. Though your parents might not even charge you the interest, my suggestion is that this be a “business proposition” and you still save $250 with NO LATE FEE.

Hopefully the above advice will save some grief in the future for those of you who truly believe that the lenders are greedy and prefer the late fee. In some cases this is true and in some case it is not. In most cases, however, it will seriously impact your ability to obtain a good loan in the future.

Peter Rosenthal
VIP Trust Deed Company