Understanding Grace Periods and Late Fees in Mortgage Loans

Even though mortgage lenders expect borrowers to submit timely and prompt payments each month, they recognize that situations will arise which can impede a borrower's ability to pay their mortgage on time. Rising home prices, accompanied with moderate incomes, may cause a financial strain in certain households—especially if an unexpected expense occurs and the borrower does not have a cash reserve.

Of course, making a late payment on a mortgage does not mean a borrower is headed toward financial ruin or foreclosure. Missed employment due to illness or layoffs can temporarily set some household back a few weeks. For this matter, mortgage lenders include a provision within the loan agreement called a grace period.

Grace periods primarily benefit the borrower. Most creditors allow a grace period. On average, borrowers are allowed to be two or three days late on auto loans and some credit cards. Fortunately, mortgage companies recognize that borrowers may need more than a couple of days. Mortgage loans have a typical grace period of 10 to 15 days. For example, if the mortgage payment is due on the 15th of the month, the homeowner will have between the 25th and 30th to send the payment. During this time, the borrower will not be penalized.

Of course, if the borrower is unable to submit payment prior to the conclusion of the grace period, the lender has no other alternative but to impose a penalty. Penalties come in the form of late fees. Late fees can be costly, especially if the borrower has a habit of submitting late payment. Furthermore, a long history of late payments may result in a higher rate on future home loans or refinances.

Late payments are typically 4%-5% of the mortgage payment. Thus, if the monthly mortgage is $1,000, the late fee imposed would be $40.

While grace period are intended to assist borrowers who are unable to pay their mortgage by the due date, those who take advantage of the full grace period will have another mortgage payment due within two weeks. If household finances do not improve, sequential payments may also be submitted late, and the cycle continues.