What is a Simple Interest Mortgage?
One of the ways some mortgage lenders advertise some of their home mortgage loan options is by offering a “simple interest mortgage.” Interestingly enough, most of the time a home mortgage loan is done in simple interest.
Simple interest is a term that means that interest is only charged on the principle of the loan balance. (Compound interest, on the other hand, is charged on the interest of the loan as well. Most home mortgage loan options that involve negative amortization charge interest on your interest.)
Most of the time, a home mortgage loan will be figured with simple interest. The difference is actually in the home loan interest accrual method. Most “regular” mortgages accrue interest monthly. This means that the annual percentage rate is divided by 12, and at the end of every month this number is used to figure the monthly interest charge. It is still done using simple interest, though.
A “simple interest mortgage,” thought, works on daily accrual. This means that interest charges are figured every day, after dividing your annual percentage rate by 365. (It is worth noting that most credit cards figure interest on a daily basis.) So, rather than simple v. compound interest being the different in a “simple interest mortgage,” the difference is really in how the mortgage interest charges are accrued.
The Daily Herald offers this good advice on making payments on a “simple interest mortgage“:
Borrowers can avoid confusion if they understand that a “simple-interest mortgage” is one that accrues interest daily, and should be managed differently than monthly accrual mortgages. With a daily accrual mortgage, every day that borrowers delay their payment results in the accrual of another day of interest.
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