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How to Protect Yourself if Your Loan Is or Has Been Converted to a Simple Interest Mortgage
Sometimes, loans that allow, but don't mandate simple interest are not treated as simple interest mortgages (or SIMs) by the lenders who originated them; but at some point the servicing of the loans may be sold to another firm who may convert them into SIMs. This year, the servicing of millions of loans has been sold to specialized servicing firms. This is a good time, therefore, for borrowers to make sure that their mortgage has not been converted into a SIM, and if it has, to develop a plan for protecting themselves. It isn't all that difficult.
The major difference between a standard mortgage and a SIM is that interest is calculated monthly on a standard mortgage and daily on a SIM. And this is the crux of the matter—if a borrower has a SIM, and he pays after the 1st of each month, he owes additional interest for every day he is late resulting in the loan balance going up rather than down. A SIM borrower with sloppy payment habits can pay for years without making a dent in the loan balance.
Those with SIMs also have to be wary of the lender's schedule for processing payments. Borrowers are credited for payments when the payments are posted by the lender, not when they are sent by the borrower. Every day of delay generates another day of interest income, and if the lender delays posting the payment past the penalty-fee period, the borrower will be billed for a late fee as well. With a daily interest charge, there is no rationale for a late charge on a SIM, but lenders impose one anyway — because they can.
The only transaction that works out better for the borrower with a SIM is monthly payments made early.
What to do:
If you find you have a SIM, you can turn the tables by making sure that every payment you make is posted by the lender prior to the due date.
How do you know if you have a SIM?
Visit The Mortgage Professor's website at http://www.mtgprofessor.com and use calculator 2a.
If the balance reported by your lender in your most recent statement is higher than the balance shown on the calculator by more than a few pennies, you almost surely have a SIM. The good news is you now know what to do about it.
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