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.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
  3. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  4. Mortgage Banker

    A company, individual or institution that originates mortgages. ...
  5. Junior Mortgage

    A mortgage that is subordinate to a first or prior (senior) mortgage. ...
  6. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
Related Articles
  1. Personal Finance

    Shopping for a Mortgage in 2017? Use This Tool First

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2017 can all be done online.
  2. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  3. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  4. Personal Finance

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Personal Finance

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
  6. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  7. Personal Finance

    Comparing Reverse Mortgages vs. Forward Mortgages

    Which one a homeowner chooses depends on where you are at this point in your life, personally and financially.
  8. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  9. Personal Finance

    Now's a Terrific Time to Buy (or Refinance) a Home

    If you are looking to make a purchase or do a refi, you will benefit from continuing low interest rates – that could dip even lower.
RELATED FAQS
  1. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  2. When Do Mortgage Payments Usually Start?

    Discover when your first mortgage payment is due and how it differs from rent. Learn about the closing process and why you ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
Trading Center