Understanding simple-interest mortgages

Knowing when interest accrues can save money
Published on Jan 28, 2008

"I am perplexed at what appears to be a nomenclature problem that the mortgage industry has created with its definition of 'simple-interest mortgage.' Aren't most monthly payment mortgages simple interest?" They are, and I agree with you that the existing nomenclature can be confusing to borrowers. Two separate concepts are involved. One is a distinction between simple interest and compound interest. The second is a distinction between monthly and daily interest accrual periods. Borrowers who don't understand these distinctions may not manage their mortgage properly. Simple Interest vs. Compound Interest: "Simple interest" means that interest is not paid on interest. With "compound interest," interest is (or can be) paid on interest. The distinction is best understood in connection with savings instruments. Suppose a bank pays an annual rate of 3 percent, or 0.25 percent a month. On a $100,000 deposit, the account would earn $250 in month one. If it were a simple-interes...