Profile picture for mibgoat

Does anyone offer a simple interest mortgage (rather than compounded)

From what I've read it seems that the compounded interest is calculated monthly while the simple interest is calculated daily - Thus if you set-up a bi-weekly mortgage payment schedule you can pay the balance down much faster. 

This will only work if the account holder is allowed to post half-payments every 2 weeks. 

Example: if $1000 is due on the first of each month and you post a $500 payment on the 14th and 28th (the month before) then:
   -> you are charged the full daily interest up to the 14th
   -> from the 14th to the 28th you are charged the interest on amount due remaining (loan balance is lower from 1/2 payment above) 
   -> 28th to the due date you are charged even less interest since the full payment has been posted before the due date
   -> Repeat each month - you will end up making 1 extra payment a year towards the balance (extra half payment twice a year since there are 26 bi-weekly periods) but the significant advantage (over compounding) is that you are charged less interest for paying down the balance faster. 

Does this make sense?  My current lendor lets us make bi-weekly payments (allowing us to make the extra payment a year to reduce loan balance) but the bi-weekly payments are not applied until the due date of each month. 

I've read that primerica is the only company to offer this kind of loan but their interest rate is often times much higher and it seems like there are all kind of horror stories. 

Lenders - anyone offer this type of mortgage
Borrowers- Has anyone gotten a simple interest mortgage to work or have you worked with primerica before?

Thanks in advance...
  • February 23 2009 - US
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Answers (4)

Simple interest is calculated based on the principal only, and is used in a 1 payment plan (i.e., borrower $10,000 today with a note due in 30 days, and the $10,000 + interest is due in 30 days.)

ALL mortgages - I repeat - ALL mortgages are based on the compund interest principle. Compounding periods can be annually, semi annually, quarterly, monthly, daily, or continuously. All mortgage payments are computed based on a daily rate on interest with a payment due at the end of 1 month.

Your lender is correct in that biweekly payments are not applied to your mortgage when paid, rather they are applied to your mortgage on the 1st of the following month. In effect, you make 1-1/2 payments twice a year, or 13 payments over the course of 12 months.

Only 1 lender had a true bi-weekly mortgage payment program, and it was patented or trademarked (I don't know which) - and that was World Savings. They used it in their Pick-A-Payment loan or Options ARM loan programs, and when you made a bi-weekly payment, your payment was credited when paid, and the interest payment was recalculated after each payment was made.

You're better off paying 1/12th of your monthly principal and interest payment in addition to making the monthly payment, and at the end of 1 year, you would have made 13 payments in 12 month.s
  • February 23 2009
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They do exist, butI would take a low fixed rate loan that has coumponded interest all day long.  Unless I had the ability to pay it off when rates start to climb...and they will.

  • February 23 2009
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Profile picture for Clearpoint
Ok forgive me for switching it around but technically all mortgages except negative amortization mortgages are simple interest because all interest is paid that month unless as I stated it's negatively amortizing then the interest not paid monthly is added to the principal and interest is charged on interest.  (Compounding interest is interst on interest)

Now a "simple interest mortgage" is a mortgage that interest is accrued daily which is what the OP questioned.  Though it should be called a daily accural mortgage since all mortgages are simple interest mortgages except negative amortization mortgages.
  • February 23 2009
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Simple interest is the opposite of compound interest. Simple interest doesn't really exist, but it is simple!

  • February 23 2009
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