In personal finance, small things can add up to big numbers. That's exactly why you are better off financing your mortgage payment with a credit card instead of defaulting on your mortgage.
A late fee is usually a small financial number. The last time I was charged a late fee it was $1.40 for my garbage bill--a sum my 3-year-old can afford to pay. Late fees on mortgages aren't that small, but they aren't going to drain your bank account either. That is, unless you let them multiply.
According to research published by the St. Louis Fed, the average homeowner who is in default on his mortgage is paying between 18 percent to 85 percent interest on outstanding mortgage payments. Compare those rates to the average credit card interest rate of 16.75 percent.
How did small monthly charges averaging from 3 to 6 percent add up to interest rates exceeding those of credit cards?
How Late Fees Add Up
Late payments are fees charged to encourage timely payment. Unlike the standard interest charged on a loan, late fees are generally not meant to attract your business, but encourage certain behavior. As consumers, we don't usually include them as a cost to borrow or use a service. Otherwise, we'd notice that several late fees can really bump up our effective rate of interest.
According to the Fed, the average late fee on a mortgage is around 3 to 6 percent. If you had a $1,000 mortgage and a 3 percent late fee, you'd owe $1,030 to bring your loan current. While most interest rates are charged annually, mortgage late fees are charged monthly. So, if your mortgage balance is outstanding for a second month you owe an additional $60.90. In two months you've rung up $90.90 in late interest charges. What was a 3 percent charge is now an effective rate of 9.1 percent interest.
Today, the average foreclosure takes nearly 15 months. During all that time, late fee interest is adding up for homeowners in default.
Preventing Late Fees
It's hard to find a way that guarantees you'll never have a late fee. However, there are many organizational methods to help you minimize the chance of paying late.
-- Pay when you get the bill. There is no law that says you have to wait to pay until the due date. If you don't want to be late, pay in advance. Each time a bill comes in your mailbox, cut your check and mail the payment back out.
-- Pay fewer times each month. The more bills you have to pay, the greater the odds that you'll forget to pay one of them. Pick one day each month to pay all of your bills. It's much easier to remember one day each month than half a dozen.
-- Pay through automatic bill pay. Many companies offer automatic bill pay since it ensures timely payment. You can usually use your checking account or credit card to make payments. All you need to do is set it up. After that, all your payments will be timely.
It doesn't take many late fees to add up to a frightening interest rate, and the only way prevent them is not to pay any bills late. As adults we have multiple bills to pay and a busy schedule; it's easy to let a few bills slip through the cracks. Take a few moments to prevent hefty late payments. You have nothing to lose.
JP is the author of the money blog My Family Finances, a site dedicated to helping families make wise financial decisions. He is also an MBA and works in corporate finance.
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