Simple-Interest Mortgage Calculator

By Stock Research Pro • May 25th, 2009

A simple-interest mortgage is a real estate property loan where interest is calculated on a daily basis as opposed to a monthly basis, as is the case with a traditional mortgage. The daily interest charge on a simple-interest mortgage is calculated by dividing the stated interest rate by 365 days and multiplying that resulting percentage by the outstanding balance. Because the interest accrued on a simple-interest mortgage is based on 365 days, as opposed to 360 days in a traditional mortgage, it will result in higher total interest costs.

Calculating Traditional v. Simple-Interest Mortgage

Again, the major difference between a simple-interest mortgage and a traditional mortgage is that interest is calculated on a daily basis with a simple-interest mortgage, as opposed to a monthly basis with a traditional mortgage.

As an example, if you have a 30-year mortgage at a rate of 6%, you would carry a monthly payment of $599.56 for either type of loan. However, on the simple-interest mortgage, the 6% annual rate is divided by 365 days, resulting in a daily rate of .0001643%. That number is then multiplied by the outstanding balance of $100,000 to arrive at a daily interest charge of $16.44.

On the traditional mortgage, the annual rate of 6% is simply divided by 12 to arrive at a monthly rate of .005%. That monthly rate is multiplied by the outstanding loan balance of $100,000 to arrive at interest due in the first month of $500.

The Benefits and Drawbacks of a Simple-Interest Mortgage

One benefit to carrying a simple-interest mortgage over a traditional mortgage is that is you make your payments ahead of the payment due date, the total amount of interest you pay over the life of the mortgage will be lower than a traditional mortgage. On the downside, there is typically no grace period with a simple-interest mortgage. If a payment is made after the first of the month, interest is paid on the entire balance for the days after the first of the month (as opposed to a traditional mortgage where payments made during the grace period is based on the principal calculated as of the first of the month).


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

delicious | digg | reddit | facebook | technorati | stumbleupon | chatintamil

Leave a Comment

You must be logged in to post a comment.

« A Coupon Equivalent Yield (CEY) Calculator | Home | Reasons to Sell a Mutual Fund »