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Low documentation home loans: what are they and should you apply? #stafford #loan


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Low doc home loans

Low doc loans are designed to assist people who do not qualify for a traditional home loan to buy a property. Low doc (or low documentation) loans still require the application to be made in writing, however you may not be required to provide much of the paperwork that is necessary with standard home loans, such as proof of income, assets or liabilities. The low doc loan relies more on a method called self-verification, where you state your income without the verifying documentation.

Who can benefit from a low doc loan?

Low doc loans are designed to benefit those people who have some existing equity or a deposit saved, and have trouble showing evidence of regular income. This could apply to the self-employed or casual workers. Low doc loans could also be made available to people with a bad credit history.

Low doc loans are also sometimes abused by people who have income they have omitted to declare to the taxation office. Failure to declare taxable income is an offence and, if caught, offenders are forced to pay penalties that far outweigh the savings they intended to make by breaking the law.

Why should I take out a low doc loan?

If you fall into any of the categories above and wish to purchase a property, a low doc loan could be your only option for obtaining the required finance. As with any major financial decision, always weigh up the pros and cons and determine whether you can afford the repayments. There could also be extra costs involved as many lenders will charge an inflated interest rate when standard documentation is not produced on application. Mortgage insurance is also a standard requirement with low doc loans, which adds further to the cost.

Most low doc loans will cover up to 80% of the value of the property (80% LVR), although the more financial documentation you can present to the lender, the higher the percentage could be.

Types of low doc loans

There are three main types of low doc loans: self-declared income, account statement and asset lend. Each of these low doc loans have slightly different eligibility requirements.

Self declared income

The most common low doc loan, where the lender will offer a home loan on a signed declaration of income, with no accompanying evidence. In general, 80% of the property value is loaned and the interest rate can be higher than a standard loan

Account statement

Requires more substantial income evidence, such as a letter from your accountant, however interest rates are usually more in line with a standard home loan .

Asset lend

This type of low doc loan requires the least evidence to be presented, in some cases no proof of income or signed declaration is needed. The loan is secured purely on the value of the property. These loans have substantially higher interest rates and, in general, a lower percentage of the value of the property can be borrowed.

What to look out for

Low doc loans generally have certain conditions and extra costs attached, such as:


Interest Rates on Student Loans Are Expected to Drop Soon – Bloomberg Business #pensioner #loans


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Interest Rates on Student Loans Are Expected to Drop Soon

In a rare bit of good news for students facing hefty college bills, interest rates on federal student loans are expected to head lower soon.

Rates on U.S. student loans are on track to drop by half a percentage point for the upcoming academic year when they are reset in July. As tuition prices escalate, borrowers have racked up $1.2 trillion in student debt, mostly in federal loans.

The expected reset would mean a college student with the average $28,000 in federal loans could save about $800 over 10 years in the most popular loan program for undergraduates, called the Stafford, assuming rates stay constant, according to a government financial-aid calculator. Currently, borrowers pay 4.66 percent annually.

“It’s a lucky time to get a student loan,” said Ward McCarthy, chief financial economist at Jefferies Co. “Historically, these rates are extremely low.”

The shift won’t help students saddled with older loans that have fixed interest rates as high as 8.5 percent. Since last June, U.S. Senate Democrats, led by Elizabeth Warren of Massachusetts, have unsuccessfully tried twice to pass bills letting student-loan borrowers refinance their existing loan balances at lower interest rates.

Congress sets the interest rates on student loans each year, based on the yield of the 10-year Treasury note yield at its May auction. The yield was 2.24 percent on Wednesday, 0.37 percentage point lower than the rate at the government’s auction a year ago, suggesting that student-loan rates will fall by about that amount. Rates for this academic year can be as high as 7.21 percent for certain graduate-school loans.

Of course, there’s a flip side to an interest rate decline, according David Bergeron, a former Education Department official. Families who are socking away money for college in bonds and certificates of deposit are out of luck, since they aren’t getting much of a return on their money.

“If you’re saving for college, this makes it harder,” said Bergeron, now a vice president at the Center for American Progress, a Washington-based policy research group.

(An earlier version of this story corrected the 10-year savings in third paragraph.)


FHA Loans – What are 203k Loans? #sba #loan #requirements


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FHA 203k Loans: What Are They? What Are the Benefits?

In this article:

Getting a Mortgage Loan for a Fixer-Upper: A Primer on FHA 203k Loans

The idea of buying a fixer-upper and turning it into your dream abode can seem so perfect every nook and cranny just to your specifications! The reality, however, can be harsh. When you realize how much it will cost to remodel, you often also realize that you can t afford it. Or you find out that a lender won t give you a loan because the home is considered “uninhabitable” as it is. That s where an FHA 203k loan comes in.

An FHA 203k loan is a loan backed by the federal government and given to buyers who want to buy a damaged or older home and do repairs on it. Here s how it works: Let s say you want to buy a home that needs a brand-new bathroom and kitchen. An FHA 203k lender would then give you the money to buy (or refinance) the house plus the money to do the necessary renovations to the kitchen and bathroom.

Often the loan will also include: 1) an up to 20 percent “contingency reserve” so that you will have the funds to complete the remodel in the event it ends up costing more than the estimates suggested and/or 2) a provision that gives you up to about six months of mortgage payments so you can live elsewhere while you re remodeling, but still pay the mortgage payments on the new home.

Which Repairs Qualify?

There are two main types of FHA 203k mortgage loans. The first is the regular 203k, which is given for properties that need structural repairs such as a new roof or a room addition; the second is the streamlined 203k, which is given for non-structural repairs such as painting and new appliances.

Among the other repairs that an FHA 203k will cover: decks, patios, bathroom and kitchen remodels, flooring, plumbing, new siding, additions to the home such as a second story, and heating and air conditioning systems. The program will not cover so-called “luxury” improvements such as adding a tennis court or pool to the property.

How Much Money Can You Get?

The maximum amount of money a lender will give you under an FHA 203k depends on the type of loan you get (regular vs. streamlined). With a regular FHA 203k, the maximum amount you can get is the lesser of these two amounts: 1) the as-is value of the property plus repair costs, or 2) 110 percent of the estimated value of the property once you do the repairs. With a streamlined loan. you can get a loan for the purchase price of the home plus up to $35,000. To determine the as-is value of the property or the estimated value of the property post-repair, you may need to have an appraisal done. You will be required to put down 3.5 percent, but the money can come from a family member, employer or charitable organization.

What Kinds of Properties Qualify?

Qualifying homes include: a one- to four-family home that has been completed for a least a year; a home that has been torn down, provided that some of the existing foundation is still in place; a home that you want to move to a new location. The home cannot be a co-op, but some condos are eligible.

Your property will also have to qualify under the usual FHA requirements. For example, its value cannot exceed a certain maximum amount, which depends on where you live.

What Are the Pros and Cons of These Loans?

The main benefit of these loans is that they give you the ability to buy a home in need of repairs that you might not otherwise have been able to afford to buy. Plus, the down payment requirements are minimal, and often you get decent interest rates (note that the interest rates and discount points will vary by 203k lender, so it s important to make sure that you re getting a good deal on the loan).

The downsides are that not all properties qualify, there are limits on the funding you can get and applying for the loan isn t easy. For example, to apply for the loan you may need to hire an independent consultant to prepare the exhibits required (to get the loan, you have to provide a detailed proposal of the work you want to do and cost estimates for each item). Get more information on 203k loans .


Credit Unions Are Good for Auto Loans #refinance #auto #loan


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Credit Unions Good for Auto Loans

By Keith Griffin. Used Cars Expert

Keith Griffin has been an automotive journalist and new car reviewer for more than 13 years. His experience as a journalist dates back 35 years. He is currently immediate president of the New England Motor Press Association.

Less than one in five used car loans are made from credit unions, which is surprising because they can be a great source of low-cost loans because they can offer competitive financing rates to their members versus other institutions.

What’s a Credit Union?

Credit unions are financial institutions formed by a group of people with a common bond (like a church, business or union). Credit union members pool their assets to provide loans and other financial services to each other.

These factors allow credit unions to pay dividends to their members (not shareholders) and offer them lower loan rates, higher savings rates and fewer service fees.

Who Can Join a Credit Union?

There are various types of credit unions. Some are affiliated with professional groups, others are part of companies, and some credit unions have geographical requirements for membership. So, basically you can join some depending on where you live.

Typically, credit unions are smaller organizations, which means you’re also going to get faster service.

Decisions are almost always made locally. Your loan check is going to be cut right there so you avoid overnight delivery fees. Other processing fees are typically lower, too.

Possible Savings

According to CUDL. the country s leader in indirect and point-of-sale lending for the credit union industry, credit unions accounted for 16.9 percent of all auto loans originating in 2007, down slightly from 18 percent in 2006. The average used-vehicle loan amount was $18,199 in 2007, a $45 increase from 2006.

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The advantage to credit unions is they are owned by their members and are not-for-profit. Terms are usually better with lower interest rates. That means your loan is going to be shorter. CUDL reports that used-vehicle loans, meanwhile, decreased in average maturity from 70 months to 65 months in 2007.

Get Shorter Loans

Find a Credit Union

The Credit Union National Association (CUNA) maintains a website that can help you find a credit union near you. It also has some good financial tools that could be helpful when making decisions about your loan.


Are Student Loans BAD DEBT? #payday #advance


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Are Student Loans Bad Debt?

Q: Are student loans considered bad debt? Or do student loans make sense for some students?

A: Student loans are not always a bad option, but you need to be careful about accepting any loan.

You need to be especially careful with student loans because it is easy to borrow too much, and student loans cannot be discharged in bankruptcy. So whatever you borrow, you need to be able to repay.

The general rule with loans is this: It is better to take a loan for something that increases in value over time than for something that decreases in value over time.

So for example, a home mortgage makes sense because the value of the house will increase over time. This is what people call ‘good debt’ because you are buying an asset. An asset is something that can earn you money over time.

On the other hand, an expensive car loan is bad because the value of the car quickly decreases over time. This is what people call ‘bad debt’ because you are buying a liability. A liability is something that will never earn money over time, it only costs money.

So before you borrow one penny, you need to ask yourself what your education will be worth over time. You need to plan for what your career will be after you graduate from school. For example, a law, medical, business, or engineering degree will almost always earn more than a psychology, history, or communications degree. So plan accordingly and avoid debt whenever you can.

How Do I Pick the Right Student Loan?

If you must take out a student loan, you need to start by completing the FAFSA form at www.fafsa.ed.gov

Most students will need help from a parent to complete the FAFSA, but this is the only way to get access to low-cost federal student aid.

1. There are three types of federal student aid:

Grants: This is financial aid that does not have to be repaid (unless, for example, you withdraw from school and owe a refund).

Work-Study: This program allows you to earn money for your education. This aid does not have to be repaid.

Federal Loans: These loans allow you to borrow money for your education. You must repay all loans, with interest. Federal loans come with fixed interest rates and are usually the cheapest form of student loans.

2. Beyond federal aid, there are also private student loans:

Private Student Loans: These loans are usually offered by banks to help you pay your education costs. Unlike federal student loans, private loans come with variable interest rates that can change monthly or quarterly. To qualify, most students need to apply with a creditworthy cosigner (such as a parent).

To save money, students should make use of all of their federal student aid options before considering a private student loan.

3. So here are all the student loan options to consider:

Federal Perkins Loans (Best Choice Option)

– Low fixed rate

– Receive up to $5,500 a year

– No payments until after school

Perkins Loans are made through participating schools to undergraduate, graduate and professional degree students. They are offered to students who demonstrate financial need and are enrolled full-time or part-time. These loans must be repaid to your school.

Federal Stafford Loans (Best Choice Option)

– Low fixed rate

– Receive up to $8,500 your first year

– No payments until after school

Stafford Loans are for undergraduate, graduate and professional degree students. You must be enrolled as at least a half-time student to be eligible for a Stafford Loan. There are two types of Stafford Loans: subsidized and unsubsidized. You must have financial need to receive a subsidized Stafford Loan. The U.S. Department of Education will pay (subsidize) the interest that accrues on subsidized Stafford Loans during certain periods. Financial need is not a requirement to obtain an unsubsidized Stafford Loan. You are responsible for paying the interest that accrues on unsubsidized Stafford Loans.

Federal PLUS Loans for Parents (Good Choice Option)

– A federal loan that parents can use for a child

– Low fixed rate

– Receive up to total cost of education

The PLUS Loan can be a good option if a parent is willing to help you pay for school. PLUS Loans are loans parents can obtain to help pay the cost of education for their dependent undergraduate children. Some parents prefer the PLUS Loan to home equity loans because they do not have to put their home at risk. It is also a better option for parents who may be considering taking money out of a retirement account for education purposes. In addition, graduate and professional degree students may obtain Graduate PLUS Loans to help pay for their own education.

Private Student Loans (Good Choice Option for Borrowers with Great Credit)

– Must have good credit or cosigner to qualify

– Comes with a variable or fixed interest rate

– Can usually cover all education costs

Private student loans from banks can be a good option after you have maximized all of your federal student aid options first. Because private student loans are typically more expensive than federal student loans, it is not recommended that you use a private loan to cover all of your education costs. If you must take out a private student loan, use those funds to cover your extra or left-over expenses. Also, if possible, it is a good idea to make interest payments on your private loan while you are still in school. If you do not, you may be surprised by the amount of interest that has accrued while you were in school. If you are a graduate or professional degree student, consider the Graduate PLUS Loan before taking out a private student loan.

Last word of advice: Check out your free money options before considering any student loan.


Are Interest Free Car Loans Too Good to be True? #no #fax #payday #loans


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Should I Take Advantage of an Interest Free Car Loan?

By Miriam Caldwell. Money in Your 20s Expert

Miriam Caldwell is a freelance writer with a specialty in personal finance. She believes that you can lay a solid foundation by starting to manage your finances in your twenties.

Question: Should I Take Advantage of an Interest Free Car Loan?

However it is important to realize that a car is a depreciating asset. Many people consider cars an investment because of the large purchase price, but a true investment should bring you a rate of return for the money you spend, and a car will not. Generally speaking a car will lose anywhere from $1600.00 to $2500.00 dollars in the first year of ownership. Most cars will depreciate from between $6500.00 to $10,000.00 over the first five years of the life of the car.

If you realize that the car is going to depreciate in value over time, the next question is to look at how much interest you will be charge over the life of your loan to see if you will come out ahead by buying a used car at a lower purchase price.

With the purchase price of $12,000.00 and an interest rate of six percent you will end up paying interest of about $1160.00 over the life of a three year loan.

It is also important to realize that the value of a car depreciates much more rapidly the first three years of the life of the car and begins to slow down by the time it is five years old. So although the car will continue to depreciate in value it will do so at a much lower rate.

Looking at the average numbers buying a three year old or a five year old car will save you money in the comparison of interest paid out ($1160.00) to the average cost of depreciation of the first year ($1600.00-$2500.00), which doesn’t take into account the further cost of depreciation over the next two or three years.

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Although buying a new car with an interest free loan may seem like a good idea on the surface, you will still lose more money than if you were to buy a used car with a loan that has interest. The loss will be even more if you roll your old car loan into a new one . If you can purchase your car with cash you will end up losing even more money in comparison with buying a new car. Additionally many used cars come with warranties and are still very reliable.


Are personal loans bad for your credit score? #government #business #loans


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Are personal loans bad for your credit score?

Taking out a personal loan is not bad for your credit score in and of itself. However, there are several factors that come with taking out a new loan that could affect your overall credit score.

What Factors Into Your Credit Score

To understand how taking out a personal loan affects your credit score, you must first understand how the score is calculated. Roughly 35% of your overall credit score is based on your payment history. Thirty percent of your score is based on the total amount of debt you owe. Ten percent of the score is based on the number of credit lines that you have opened recently.

The last two factors are initially impacted by a new personal loan. Your total debt increases overall, and a new credit line is opened. The credit agencies take note of this activity and could possibly lower your credit score based on the new loan. However, your overall credit history has more impact on your credit score than a single new loan. If you have a longer history of managing debt and making timely payments, the effect on your credit score from a new loan is likely to be lessened.

Keeping a New Personal Loan From Damaging Your Credit Score

The easiest and best way to keep a personal loan from negatively affecting your credit score is to continue making payments on time and to pay off the debt within the terms of the loan agreement. A personal loan that you pay off in a timely fashion can actually have a positive effect on your credit score; it demonstrates that you can handle debt responsibly.


What Are Modern Day Loan Sharks? #compare #loan #rates


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What Are Modern Day Loan Sharks?

Home > Debt Help > What Are Modern Day Loan Sharks?

After watching a few episodes of Discovery’s Shark Week. I was surprised that the most infamous shark wasn’t highlighted – the loan shark.  I guess the marine biologists don’t give much thought to loan sharks, but I can’t help but to tie things to a financial reference when possible.

With the advent of the credit card and lines of credit at local banks, loan sharks have lost popularity in the last 50 years, but they’re not extinct! We’ll look at how loan sharks have evolved, but first let’s take a look at the history of loan sharks and the practice of usury.

What is Usury?

Usury is a word used to describe the practice of charging excessively high (and often illegal) interest on loans. The practice of usury dates back to Biblical times and in the Old Testament, we find instructions for the Israelites on how they should handle money.

If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest. – Exodus 22:25 NIV

You must not lend them money at interest or sell them food at a profit. – Leviticus 25:37 NIV

He does not lend to them at interest or take a profit from them. He withholds his hand from doing wrong and judges fairly between two parties. – Ezekiel 18:8 NIV

The Israelites were instructed never to borrow from anyone, but they could lend to foreigners. Interestingly, they were instructed never to lend to each other, which is a great topic to discuss in itself!

Modern Day Loan Sharks

Fast-forward to the 1800s and you’ll find that small loans were undesirable because of the stigma behind it. People were looked down upon if they had to borrow a small amount. Also, banks and other financial institutions stayed away from this form of lending, so those in need of a loan sought out private lenders who often provided loans at very high rates.

Since it was actually illegal to charge exorbitant rates for loans, the loan shark didn’t have any legal way to go after the borrower if they didn’t repay, so they would use other means to scare them into paying. To enforce contracts, these loan sharks used blackmailing and harassment, and violence was added with gangs of loan sharks in the 1900s.

As for today, states regulate the maximum rate at which a loan can be made, putting the loan shark of old on the endangered species list. However, as a way to bypass the rules to charging interest, payday loans. sub-prime lending. and non-standard consumer credit have found ways to provide the money advancement service for individuals in need of loans. Generally, the borrowers will have lower credit and limited resources to get a loan elsewhere, so they will use a borrowing service to advance a paycheck.

Lending always seems to be evolving, but it’s interesting that there’ll always be a loan shark in some form – you just need to pay attention!

How are you doing at staying away from the loan sharks? Leave a comment!


Your Money: Car loans are cheap, but shop around #department #of #education #loan #consolidation


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Your Money: Car loans are cheap, but shop around

Scott Halleran, Getty Images

New luxury sedans are seen at the Mercedes-Benz of Houston Greenway dealership in Houston.

New luxury sedans are seen at the Mercedes-Benz of Houston Greenway dealership in Houston. less

It’s hard to beat the thrill of jumping behind the wheel of a new car at the North American International Auto Show, especially if your clunker is already 9 or 10 years old.

But how exciting is a car loan? Just itching for another monthly payment? Yeah, right.

The hot news about car loans this year, though, is that rates are lower than last year — so shopping around for car loan could prove invigorating when you snag a real deal.

“We’ve never seen rates this low” in the surveys of banks and credit unions, said Greg McBride, senior financial analyst at Bankrate.com .

Bargain car loan rates — both for used and new cars — are hovering around 3% or so now at banks and credit unions.

Plenty of carmakers are offering 0% and 1.9% financing on several models, too. But make sure to run the numbers on various online calculators to determine whether you’d be better off taking a cash-back rebate than 0% financing, if given a choice.

In mid-January, the average new car loan rate was 4.15% for a five-year new car loan at banks and credit unions surveyed by Bankrate.com .

The average used car loan rate was 4.77% for a four-year used car loan, according to Bankrate.com.

“We’re in a prolonged low-rate environment, and I don’t think they’ve bottomed yet,” McBride said.

Another trend: Some lenders are offering new car loans that go beyond five years, say 72-months, and a few are rolling out 84-month car loans.

Comerica’s 3.99% rate, for example, applies to 60-month and 72-month car loans.

Melinda Zabritski, director of automotive credit for Experian, said some consumers with lower credit scores can qualify for a more expensive new car if they opt for a six-year loan instead of five years.

Some consumers with higher scores opt for seven-year car loans to buy luxury brands, she said.

“A lot of it is an effort to make some expensive vehicles a little more affordable on a month-to-month basis,” Zabritski said.

Be warned, though: Dragging out a car loan to six or seven years drives up total interest paid for a car; and a consumer risks owing more on the car than it’s worth when it comes time to sell.

Another warning: If you don’t shop around for a car loan rate, though, it’s easier to get taken for a ride on rates.

“We see greater disparity in auto loan rates than any other product,” McBride said.

Lenders often decide what kind of market share they want in the auto loan business and price their car loans accordingly. And yes, many realize that consumers don’t shop for car loans as diligently as they should.

Does that mean everyone gets a car loan at less than 5%? Absolutely not. Rates vary by credit history.

The Detroit-based Communicating Arts Credit Union had received an initial $1.5 million federal grant in November 2011 to develop a bailout program for people who have extremely high car loan rates.

As part of that program, the credit union had 34 auto bailouts that had original car loan rates in excess of 19%. One customer refinanced a rate of 25% to 3.25%.Other customers refinanced rates of nearly 25% to a range of 9.5% to 12.5%.

Going to 5% from 25% would drop the monthly payment to $188.71 from $293.51 on a five-year, $10,000 car loan.

Hank Hubbard, president and CEO of the Communicating Arts Credit Union, said many times shoppers don’t realize they have alternatives. Some old loans may have been made during the credit crunch.

We’ve swung from one extreme where anyone could get a car loan during the economic boom to another extreme where lenders were paranoid about making loans to creditworthy consumers during the financial meltdown.

Now, “Lenders are certainly making loans available,” Experian’s Zabritski said.

Typically, Toprak said, someone with a 620 credit score could be getting a rate of 8.9% or higher now; while someone with a 500 credit score could be offered 13.9% now.


What Are Simple Interest Mortgages? Mortgage Professor #interest #loan #calculator


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If two loans are exactly the same but one is simple interest, I would take the traditional mortgage. You will pay more interest on the simple interest mortgage unless you systematically make your monthly payment before the due date.

What Are Simple Interest Mortgages?

January 5, 2004, Revised July 16, 2004, April 15, 2005, November 27, 2006, April 29, 2008

What are the benefits/drawbacks of a simple interest loan versus a traditional mortgage? Which would you take if offered the choice?

If two loans are exactly the same but one is simple interest, I would take the traditional mortgage. You will pay more interest on the simple interest mortgage unless you systematically make your monthly payment before the due date.

Calculating Interest on a Simple Interest Mortgage

The major difference between a standard mortgage and a simple interest mortgage is that interest is calculated monthly on the first and daily on the second.

Consider a 30-year loan for $100,000 with a rate of 6%. The monthly payment would be $599.56 for both the standard and simple interest mortgages. The interest due is calculated differently, however.

On the standard mortgage, the 6% is divided by 12, converting it to a monthly rate of .5%. The monthly rate is multiplied by the loan balance at the end of the preceding month to obtain the interest due for the month. In the first month, it is $500.

On the simple interest version, the annual rate of 6% is divided by 365, converting it to a daily rate of .016438%. The daily rate is multiplied by the loan balance to obtain the interest due for the day. The first day and each day thereafter until the first payment is made, it is $16.44.

[Note: On many commercial mortgages, the annual rate is divided by 360 instead of 365, making the daily rate a little larger.]

The $16.44 is recorded in a special accrual account, which increases by that amount every day. No interest accrues on this account, which is why it is called simple interest . See The Nomenclature of Simple Interest Mortgages. or Mortgage Concepts Homebuyers Should Know.

When a payment is received on a simple interest mortgage, it is applied first to the accrual account, and what is left over is used to reduce the balance. When the balance declines, a new and smaller daily interest charge is calculated.

Total Interest Payments on a Simple Interest Mortgage

How does this work out for the borrower? We know that a standard 30-year mortgage pays off in 30 years. Beginning January 1, 2004, this amounts to 10,958 days. On a loan of $100,000 and an interest rate of 6%, total interest payments amount to $115,832.

On the simple interest version of the same mortgage, assuming you pay on the first day of every month, you pay off in 10,990 days, or 41 days later than with the standard mortgage. Total interest payments are $116,167 or $335 more.

These are small differences, due largely to leap years. Over the 30 years beginning 2004, there are 8 years with 366 days, and the lender collects interest for those days. Leap years do not affect total interest payments on a standard mortgage.

The disadvantage of a simple interest mortgage rises with the interest rate. At 12%, and continuing to assume payment on the first day of every month, it pays off in 11,049 days or 91 days later than the standard mortgage. Total interest is $3082 higher.

Total Interest When Payments Are Late

But the borrowers who really get clobbered by the simple interest mortgage are those who pay late. The standard mortgage has a grace period within which borrowers can pay without penalty. On a simple interest mortgage, in contrast, borrowers pay interest for every day they are late.

Suppose the borrower pays on the 10th day of every month, for example. With a standard mortgage, he gets a free ride because of the grace period. With a simple interest mortgage at 6%, he pays off 101 days later than the standard mortgage and pays $1328 more interest. At 12%, he pays off 466 days later and pays $15,137 more interest.

Penalties for payment after the grace period work the same way on both types of mortgage. For this reason, I have not included penalties in the calculations.

Borrowers making extra payments also do better with a standard mortgage. A borrower who includes an extra $1,000 in his regular monthly payment, for example, will save the interest on that $1,000 for each day the payment is late, provided it is within the grace period. With a simple interest mortgage, in contrast, interest accrues for those days.

Making Payments Early

The only transaction that works out better for the borrower with a simple interest mortgage is monthly payments made early. If every month you pay 10 days before the payment is due, for example, you pay off 40 days sooner than the standard mortgage at 6%, and 254 days earlier at 12%. There is no benefit to early payment on a standard mortgage, since it is credited on the due date, just like a payment that is received 10 days late.

Bottom line: other things the same, take the standard mortgage. But if you are stuck with a simple interest mortgage, make it a habit to pay early; it will pay big dividends.

Note: Simple interest biweekly mortgages raise other issues. See Simple Interest on a Biweekly .

Days to Payoff and Total Interest Payments on a Standard Mortgage and Simple Interest Mortgage of $100,000 for 30Years Beginning January 1, 2004