Standard Mortgage
Save Fortune with a simple Mortgage
A simple interest mortgage is a mortgage where interest is calculated daily instead of monthly as with a standard Mortgages.
Rather, the impact of the name is a simple interest mortgage anything but simple.
But a simple mortgage has its advantages.
First consider a standard mortgage of $ 100,000 at 6% interest rate with interest calculated on a monthly basis.
The interest due each month on a standard mortgage is equal to the monthly interest rate multiplied by the remainder of the loan. The monthly rate is the annual interest rate of 6% divided the number of months in a year.
So in the first month, the interest charge to 0.5% multiplied by $ 100.000 grant $ 500.
With a simple interest mortgage, the 6% interest rate divided by 365, since the interest is calculated daily rather than monthly.
In leap years, the annual interest rate divided by 366
In a typical year, the daily rate 0.016% (rounded).
The interest for each day is equal to the daily rate multiplied by the remainder of the loan.
For the first month is $ 16.44 each day.
This $ 16.44 accrue each day until payment is received. When the lender receives a payment for the simple interest mortgage, the payment is first applied to interest and then to principle.
As a simple interest mortgage accrues interest on a daily basis, the number of days in the month has an impact on the fees in amount.
For example, the first month of the loan if is 30 days, the total rate is $ 493. But if the month has 31 days interest charged is $ 510. So in a 31-day month, the interest rate on a simple interest mortgage higher than a standard mortgage.
If you borrow using a simple interest mortgage, you should be wary of when you send your payments.
Since interest on a simple interest mortgage is calculated monthly, there is no grace period as with a standard mortgage. Each day past the due date costing an extra $ 16.44 a day.
As a simple interest mortgage payments apply first to your interest and your principle seconds, late payments cost you more than just extra money in interest.
If you are more than six days late with your payment during the first month, not one penny will go toward your principle. Not only that, you could end up with negative amortization, especially if you are more than six days late.
Being careful with your payments is a must if you have a simple interest mortgage, otherwise you will find yourself paying more money in interest than necessary.
Moreover, it could take you longer to pay your loan.
Do not think that just because a lender receives extra interest when you are late on a simple interest mortgage payment, you are not covered by a late payment fee.
Late payment fees will still apply. Also think that "late" to the lender depends on when payment is sent your account, not when you wrote the check or when you place payment in the mail.
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