subject: Shopping For Mortgages [print this page] When you decide to start shopping for a mortgage, there are a few things to keep in mind. There are a few pitfalls that you should watch out for as well when you start shopping around for a mortgage that is simple interest vs. a standard mortgage. The term "simple interest" can sound harmless enough, but the truth is that it could cost you more money in the long run if you don't pay attention to what you are getting yourself into.
When you get a simple interest mortgage, the interest charges are calculated on a daily basis. A regular mortgage on the other hand charges only once a month. If you pay your mortgage every month on the due date exactly, there really is no difference between the two. But if you pay it a few days late, you will be penalized.
For people who decide to get a simple interest mortgage, they usually tend to pay their mortgage late because these types of mortgages usually have a grace period of about two weeks before you are charged with any late fees. So for example, if you have a mortgage that is due on the first of the month, and you get your payment to your mortgage company on the 15th, that adds up to be about half a month of interest and that doesn't include if the mail runs a bit slower that month. You are having additional interest tacked on.
It's true that if any additional interest is added it usually is a small amount. You end up only paying the amount of your principal payment that you have every month. If you have a simple interest loan, each day that your mortgage payment is late, you are charged against your balance. For example, let's say that you owe $200,000 on your mortgage and that $500 of your monthly payment goes just for interest. Each day you are late on a payment; you are charged against the $200,000. The $500 difference is charged bout 32 cents a day if your loan has an interest rate of 6 percent. It may not seem like a lot, but over the life of your loan it can really add up quickly. On a 6 percent mortgage, and if you are always 10 days late, you are looking at paying an additional 3 mortgage payments at the end of your 30 year loan.
There is an upside to simple interest loan though. If you are the type of person that likes to pay your mortgage payments earlier than when they are due. By making your payments early, you will be saving money rather than paying more and losing more. There are only a select few number of borrowers who are actually able to do this since interest is still figured out once a month.
One final thought, if your lender does indeed tell you that you are getting a standard mortgage, it doesn't mean that it will stay that way unless it is written in the contract. Some mortgage companies have the tendency to sometimes switch from a standard mortgage to a simple interest loan especially if the terms of the loan don't prohibit them from doing this. It's always a good idea to make sure your agreement or contract says what type of mortgage you are getting yourself into.
