No Mortgage Interest Is Really Simple

The "simple" part of a simple interest loan is that mortgage interest is computed daily each and every day since the last payment was applied. That means, a borrower owes more interest in "long months," such as March, than in short months like February. In my opinion, there's really nothing else simple about it, though, I'm sure there's some bankerly explanation somewhere that can make it seem simple.

If the borrower pays on the first of the month always, at 6% the simple interest loan will cost a few hundred dollars more than a conventional mortgage. If the borrower pays on the 10th, well-within a standard grace period, the borrower could owe a couple thousand dollars more, because "simple" interest loans don't have grace periods.

You could pay half of your payment on the 15th and half on the 30th (except February), but first you'd need to get ahead by one half payment or you would be half a payment late every month.

Simple vs. Conventional Interest

Chart © by The Mortgage Professor, Dr.Guttentag

When Mortgage Interest Is Higher

When interest rates are higher, for example 12%, the differences between compound and simple interest become greater and require more diligence.

You can see in the chart that at 6% interest, paying a simple interest loan 10 days late costs only $1328 extra, only a thousand dollars more than paying it on time for 30 years.

However, at 12%, the difference is over $15,000 for being 10 days after the first, and is over $3000 more even if paying on the first.

In using the HELOC cycling technique explained in Let Your Mortgage Make You Rich! we have our mortgage payment scheduled for the 12th of the month. Our grace period is 15 days on our conventional 30-year loan. Therefore, if there's a long weekend with no payment processing for three days, we're still in on time before the 15th. As our bank changed its policies a couple of times, it became more difficult to pay it manually, and very much more difficult to reschedule the autopay (it would skip the following month!). So this works for us.

Whichever kind of interest your loan is, the interest owed is always calculated on the outstanding balance, whether it's figured daily or monthly. Therefore, to pay off the property faster, reduce principal faster.