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What Is a Simple-Interest Mortgage?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 04 September 2016
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A simple-interest mortgage is a specific kind of mortgage where interest is calculated daily. It’s important to note that in a simple-interest mortgage, interest is not compounded daily, which would lead to much greater amounts of debt over time. Rather, the simple-interest mortgage converts the interest rate and other figures to a daily number instead of the monthly calculations common on standard mortgages.

According to many mortgage experts, the actual debt result between a standard mortgage and a simple-interest mortgage is negligible. One of the biggest factors in the difference between a standard mortgage and a simple-interest mortgage is a case where a borrower may make mortgage payments late every month. If the mortgage is calculated according to a simple-interest method, these late payments may result in much more debt over time.

Simple interest mortgages represent one of a number of mortgage types that alter the calculations and figures involved in ongoing mortgage debt. Some of these only affect debt amounts and payments on a marginal basis. Others can have an extreme effect on the mortgage debt that households owe to lenders.

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One less radical type of mortgage calculation that is similar to a simple-interest method for mortgages is a biweekly mortgage calculation. In a biweekly mortgage system, rather than calculating the interest daily, or monthly as in a standard mortgage, the interest is calculated biweekly. Here, the year is split into 26 pay periods, rather than the standard 12 payments, or 24 payments for mortgage payments that are made twice a month.

Borrowers who are examining a simple-interest mortgage or similar kind of mortgage should also look at a more critical part of the mortgage that can affect the interest rate and debt result. Two different kinds of mortgages include fixed rate mortgages and adjustable-rate mortgages. In a fixed-rate mortgage, the interest rate is fixed over the term of the loan. In an adjustable-rate mortgage, the interest rate on the loan can go up or down depending on the prime lending rate in the country that the mortgage is written in. While some borrowers may desire an adjustable-rate mortgage, for the majority of borrowers, this type of mortgage is considered risky, and should be approached with extreme caution.

One of the possible benefits for simple-interest mortgages is that borrowers may be able to gain by paying off their mortgage early or making consistently early mortgage payments. These borrowers need to check their loan agreements for prepayment penalties that may ultimately punish early payoffs or payments. Simple-interest mortgages can be made on different time frames, similar to standard mortgages. A simple-interest type of mortgage can be made for 15 or 30 years, much like a standard conventional mortgage or a government-backed mortgage loan.

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