Dear Dr. Don,
My wife and I are in the process of refinancing our home from a traditional 30-year fixed into a 15-year simple-interest mortgage. We signed all of our papers and did not know that we went from a traditional mortgage into a simple-interest version. After reading mixed reviews, I'm concerned.
I actually think it may help us because we make our payments one month in advance. (If it is due on Nov. 1, we make it on Oct. 1.) Will this end up saving us money in the end?
-- Rick Refi
You don't say how long the 30-year fixed-rate mortgage has been in place. That and the interest rate are critical in comparing the savings you captured by refinancing with a new 15-year simple-interest mortgage.
A simple-interest mortgage charges daily interest instead of monthly interest. When the mortgage payment is made, it is first applied to the interest owed. Any money left over is applied to principal. The reduced principal balance means the daily interest expense is lower because of the reduced principal balance.
There are no grace periods with a simple-interest mortgage. Interest keeps accruing. Making the payment a month early reduces your interest expense with a simple-interest mortgage. Making late payments increases the interest expense.
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