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A simple-interest mortgage calculates your interest charge based on your current outstanding principal balance each day rather than using a fixed amortized schedule. Every day that passes, a day's worth of interest accrues on whatever principal you still owe. If you pay on time, a simple-interest mortgage behaves exactly like a standard mortgage. If you pay early or late, the timing directly changes how much interest you owe.
Think of it like a hotel charging by the night you actually stay, rather than billing a flat weekly rate regardless of when you check out.
Most conventional mortgages are amortized on a monthly basis. Your interest charge for the month is calculated once, at the start, based on the outstanding principal. It does not change within that month regardless of when during the month you make your payment.
A simple-interest mortgage works differently. Interest accrues every calendar day. Your daily interest charge equals your outstanding principal multiplied by your annual interest rate, divided by 365. If you owe $300,000 at 6%, your daily interest accrual is approximately $49.32. Pay two days early and you save $98.64. Pay two days late and you owe $98.64 more than expected.
On a standard amortized mortgage, paying on the 15th versus the 5th of the month makes no difference as long as you pay before the due date. On a simple-interest mortgage, paying on the 5th saves money compared to paying on the 15th, because you stop daily interest accrual ten days sooner.
This also means that if your payment posts late even by a few days, more of your payment covers accrued interest and less covers principal. Over years, consistent late payments on a simple-interest mortgage can meaningfully slow equity buildup compared to consistent on-time payments.
Simple-interest mortgages are not the standard product in U.S. residential lending. They appear in specific contexts. Some manufactured housing loans and certain non-qualified mortgage products use simple interest. Biweekly payment programs at conventional banks sometimes work on a simple-interest basis. Home equity lines of credit also typically accrue interest on a daily basis because the outstanding balance can change with draws and repayments throughout the month.
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