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Save money on simple interest mortgage if pay earlier?

I have a Simple Interest Mortgage. My payment is due on the 26th but I've been paying it around the 20th of the month. With a simple interest mortgage if I make my payment earlier in the month will I save more money?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

You typically derive no financial benefit from making your monthly payment on a simple interest mortgage earlier than the due date because the lender holds the payment in an escrow account until the payment date. Making your simple interest mortgage payment early typically benefits the lender because they can borrow against the money (your early payment) they hold in the escrow account but your payment does not reduce your mortgage balance or interest expense. You can contact your lender to confirm when they apply your payment to your account.

Please note that a simple interest mortgage is typically inferior to a standard mortgage because the payoff date for a simple interest mortgage is approximately 30 years plus 3 months due to leap days every four years. So the actual term for a simple interest mortgage is longer than the fixed 30 year term for a standard mortgage which means you pay more in interest expense, regardless of when you make monthly payment.

Typically the only way a borrower can make a simple interest mortgage superior to a standard mortgage is by paying more than the required mortgage payment, which is known as accelerating the mortgage. Accelerating the mortgage lowers the principal balance faster which reduces the mortgage term and lowers your interest expense over the life of the mortgage. Because the daily interest accrual for a simple interest mortgage is calculated based on a reduced loan balance at the end of each month, accelerating a simple interest mortgage provides greater benefits to the borrower than accelerating a standard mortgage. FREEandCLEAR provides a comprehensive review of the mechanics and benefits of mortgage acceleration as well as a MORTGAGE ACCELERATION CALCULATOR you can use to evaluate different mortgage overpayment scenarios. Without having all the information about your situation, our preliminary recommendation is that make your payment on the due date (26th) and overpay your mortgage by an amount within your budget.

Because simple interest mortgage typically do not provide any real benefit to the borrower they are very uncommon. You may want to consider refinancing your current mortgage into a standard mortgage.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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