Simple-interest mortgage can be a trap

How late payments, daily interest accrual cause grief

Learn the New Luxury Playbook at Luxury Connect | October 18-19 at the Beverly Hills Hotel

The more I learn about simple-interest mortgages (henceforth SIMs), the more aware I have become that my previous articles on the subject understated the risks they pose for borrowers. I placed too much emphasis on the fact that a borrower with disciplined payment habits can manage a SIM at no more cost than a standard mortgage with the same interest rate and term. But most borrowers slip up now and then, and for them a SIM can be a trap. Interest on a SIM Versus a Standard Mortgage: On a SIM, interest accrues daily instead of monthly. Consider a 30-year 6 percent mortgage for $100,000. On the monthly accrual version that is the standard in the United States, interest accrues monthly, and the borrower enjoys a 10-15 day grace period for paying it past the due date. For example, the borrower owes .06/12 x 100,000 = $500 of interest for the first month. If the due date is the first of the month and the grace period is 10 days, he can pay the $500 anytime before the 11th without having t...