Simple-Interest Mortgage

DEFINITION of 'Simple-Interest Mortgage'

A mortgage where interest is calculated on a daily basis, as opposed to a traditional mortgage where interest is calculated on a monthly basis. On a simple-interest mortgage, the daily interest charge is calculated by dividing the interest rate by 365 days, and then multiplying that number by the outstanding mortgage balance. If you multiply the daily interest charge by the number of days in the month, you will get the monthly interest charge.

Because the total number of days counted in a simple-interest mortgage calculation is greater than a traditional mortgage calculation, the total interest paid on a simple interest mortgage will be slightly larger than a traditional mortgage.

BREAKING DOWN 'Simple-Interest Mortgage'

There are pros and cons associated with a simple-interest mortgage. One con is that there is usually no grace period in a simple-interest mortgage. If a payment is made later than the first of the month, interest must be paid for the days after the first of the month on the entire loan balance. This is opposed to a traditional mortgage where a payment made during the grace period remains based on the principal balance amount as calculated for the first of the month.

One pro is that if you make blended payments before the due date on a simple interest mortgage, then the total amount of interest over the life of the loan will be lower than under a traditional mortgage.

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RELATED FAQS
  1. What are the pros and cons of a simple-interest mortgage?

    The basic disadvantage of a simple interest mortgage lies in the fact that unless the borrower conscientiously makes all ... Read Full Answer >>
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    Federal Housing Administration (FHA) loans require escrow accounts for property taxes, homeowners insurance and mortgage ... Read Full Answer >>
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