Can Simple Interest Mortgages Save You Money on Interest?
When you hear the phrase “simple interest” in the context of something that you must repay, it is natural to think that you are getting the best of all possible worlds. You remember learning about simple interest and compound interest in school. With simple interest, you only pay interest on the amount you originally borrowed, but with compound interest, you also pay interest on the interest, so the longer it takes you to repay the loan, the more you pay. By this logic, a simple interest mortgage sounds like a dream come true. Imagine making payments for decades, as one does with a home mortgage loan, without paying compound interest. Unfortunately, that is not how simple interest mortgages work. They charge compound interest, just like every other mortgage does, but the way they calculate it is different. For help making informed decisions about borrowing and repaying home mortgage loans, contact a Philadelphia debt relief lawyer.
How Do Simple Interest Mortgages Calculate Interest?
When your real estate agent speculates about the mortgage loans you can get in today’s market, and when the loan officer locks the interest rate as you go through the steps of negotiating a purchase price with the seller, the interest rate they are talking about is the amount of interest you pay per year. In 2026, a borrower with good credit can get a mortgage loan with an interest rate of about six percent.
Of course, things are not as simple as the lender looking at your mortgage balance once a year, on the anniversary of your closing, and then adding six percent of the outstanding balance to what you owe. Instead, the lender charges interest every month, and you pay every month. Therefore, every month, the lender adds one twelfth of six percent to the outstanding balance, that is 0.5 percent of the outstanding amount.
By contrast, simple interest mortgages calculate the interest every day. Each day, your balance increases by about 0.016 percent of the outstanding amount.
The Ideal Candidate for a Simple Interest Mortgage
Simple interest mortgages can save you money on interest, but only if you make payments more often than once per month. Therefore, the ideal candidate for a simple interest mortgage is someone who is in a position to make more frequent payments. For example, if you get paid weekly or semimonthly, you should make a payment every pay period, or perhaps you should make a payment toward the mortgage at the end of every month, and your spouse should make a payment on the 15th, each in proportion to your respective incomes. If you have multiple jobs, you can make a payment from one paycheck at the end of the month and a payment from the other in the middle of the month.
Contact CONSUMERLAWPA.com About Making Mortgages Affordable
A Philadelphia consumer law attorney can help you if you are despairing of being able to afford a home mortgage loan. Contact at CONSUMERLAWPA.com to set up a free, confidential consultation.
Source:
investopedia.com/terms/s/simple_interest_mortgage.asp
