Simple Interest Mortgages

One of the many types of mortgages competing with straight-forward traditional mortgages is the simple-interest mortgage. It is important to understand loan types like these so you will have a good background on what their possible advantages and disadvantages can be.

A simple interest mortgage differs from a traditional, fixed rate mortgage only in that interest is calculated daily for a simple interest mortgage and monthly for a traditional mortgage. You will end up paying more money on a simple interest mortgage unless you systematically make your mortgage payment before the due date.

The major difference with simple interest comes in when your loan will be paid off in full. If you always make your payments on time, you will end up paying off your loan in full only a little later than if you had a traditional mortgage. The difference is only due to things like leap years that are not accounted for in standard mortgages.

However, unlike traditional mortgages, simple interest mortgages allow for no margin of error with your payments. Fixed rate mortgages generally have some sort of grace period where payments that are received after the due date but within the grace period are not penalized. With simple interest loans, there is no grace period. Borrowers who pay late will pay for it with extra interest payments and a longer time before the loan is paid off in full.

The only real advantage of a simple interest mortgage is the ability to pay the loan off slightly early if payments are made early on a consistent basis. However, even if you pay ten full days early every month, you won’t pay off the mortgage all that much sooner. Exactly how much time early payments cut off depends on the interest rate, but it will rarely be over a year.

In sum, simple interest may sound like a good concept, but there are few advantages to this type of set-up as opposed to a traditional fixed rate mortgage.