Simple Interest Mortgage

Simple-interest mortgages are one of the many mortgage types competing in the loan marketplace today. Simple-interest mortgages have both advantages and disadvantages when compared with traditional mortgages.

The primary difference between simple-interest mortgages and other mortgage types is one of accounting. While traditional mortgages calculate interest on a monthly basis, simple-interest mortgages calculate interest daily. Unless mortgage payments are made on the due date consistently and without fail, a simple interest mortgage could cause you to lose money.

Because simple-interest mortgages differ primarily in terms of amortization and accounting issues, the major consequences of selecting a simple-interest mortgage involve when your loan will be paid off in full.

If all your payments are made on time, it will take you only slightly longer to pay off a simple-interest mortgage than a traditional mortgage. Note: The difference is due mainly to things like leap years not considered in other mortgages.

However, the simple-interest mortgage leaves absolutely no margin for error concerning payment dates. Traditional mortgages offer a 15-day grace period, allowing you to make payments up to the fifteenth of the month, though they are due on the first. With simple-interest mortgages, there is no grace period, and extra interest payments will be tacked on when borrowers pay late.

The advantage of a simple-interest mortgage is early repayment if monthly payments are made early. However, this early repayment does not shorten your repayment time by a large margin. If you pay a full ten days early each month, you may only end up paying your loan off one year early.

In short, a simple-interest mortgage may not be a good idea for most borrowers, since it provides limited benefits and low payment flexibility.