“I have a simple-interest mortgage and want to develop an amortization schedule. I called the lender, but they don’t have one, and they did not know how to advise me on how to calculate one.”
A simple-interest mortgage is one on which interest is calculated daily instead of monthly. On a 6 percent loan, for example, .06 is divided by 365 to obtain a daily rate of .016438 percent. This is multiplied by the balance every day to calculate the daily interest. On monthly accrual loans, in contrast, .06 is divided by 12 to obtain a monthly rate of .005, which is multiplied by the balance every month to obtain the monthly interest.
While amortization schedules are often printed out for monthly accrual loans, I have never seen one for a simple-interest loan. The logistics are just too formidable. Where an amortization schedule for a 30-year monthly accrual mortgage has 30×12 = 360 lines of numbers, the simple-interest loan has 30×365 = 10,950 lines. Assuming 50 lines a page, you would need 219 hard-copy pages.
And that’s just for starters. Your first schedule would assume that all payments are posted on the due date, say the 17th of the month. If your first payment is actually credited on the 16th or the 18th, assuming you want the schedule past that point to be accurate, you would have to redo the entire schedule. The same holds if you make an extra payment at any time.
Note that on a simple-interest loan, what matters is not when you make the payment but when the lender credits your account. On a monthly accrual mortgage, if you pay on the eighth and your account is not credited until the 10th, it doesn’t matter because your payment is within the grace period. But on a simple-interest mortgage, the two days between payment and posting will cost you two days of interest.
The upshot is that developing a hard-copy amortization schedule for a simple-interest mortgage is not practical. The good news, however, is that a virtual substitute is available. I have placed an Excel spreadsheet on my Web site that accrues interest daily, allowing you to keep track of exactly where you are on your simple-interest mortgage. You can keep a permanent record by downloading the spreadsheet onto your computer and entering each payment when you make it.
Just remember that you enter the payment as of the date it is posted to your account, not the day you think it should have been posted. This may require that you do some research on the lender’s internal operating procedures. Not the least benefit of monitoring a simple-interest mortgage with a spreadsheet is that it will quickly reveal any payment-posting shenanigans by the lender.
The program you download has a complete amortization schedule built in based on payment every 30 days. If you actually followed that routine religiously, you would pay off a 30-year, 6 percent loan in 10,560 days, or 398 days early. That gives you something to shoot for. If you don’t make the payment on the date assumed by the spreadsheet, you delete it and insert the payment on the date you do make it. The entire schedule beyond that point will automatically recalculate — that’s the power of a spreadsheet.
Does It Really Pay to Pay a Simple-Interest Mortgage Early?
“I found that if I paid early one month and made the next payment on the due date, the interest payment went up. So does it really pay to pay early?”
Yes, on a simple-interest mortgage, it always pays to pay early.
To convince you, I used the spreadsheet mentioned above to perform an experiment that mirrored your case. Using a $100,000, 30-year loan at 6 percent, I first made the scheduled payment on days 31 and 62. The balance on day 62, reflecting the effects of both payments, was $99,819.60. Then I did it again, except that in this case I made the payments on days 30 and 62. The balance in month 62 was $99,819.50, or $.10 less.
A dime is not a lot of money, but it reflects only one early payment, early by only one month. Over time, the savings grow, the more so as more payments are made early. See my example above of the significant term shortening from paying every 30 days.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.