May 1 $333.33 $99,855.91 $328.80 $99,851.38
May 10 $333.33 $99,855.91 $438.40 $99,960.98
May 15 $333.33 $99,855.91 $493.20 $100, 015.78
SIMs Can Ensnare Unwary Borrowers
To pay off the SIM loan balance on schedule, the borrower must make the payment on or before the due date every month. Further, the payment date is not the day a check is placed in the mail, or even delivered in person to the office of the servicing agent. It is the date when the agent records the payment as received, which doesn't happen until a check clears. In my example, if the borrower doesn't pay until the 15th, his loan balance will rise rather than decline.
I have heard from borrowers who made payments on SIMs for years without ever making a dent in the amount they owed. In most such cases, the borrower was unaware of how their mortgage worked.
BEATING THE SIM WITH EARLY PAYMENTS
The one potential advantage that a SIM offers the borrower is a credit for early payment. Note in the table that when payment is made on April 25, the monthly interest due on the standard mortgage remains the same while the SIM borrower pays only 25 days of interest. But this is a one-time saving, don't assume that if you pay regularly on the 25th of the month, your interest charge will continue to cover only 25 days. From the 25th of one month to the 25th of the month following is 30 or 31 days. The only borrowers who would obtain a continuing benefit are those who can make their monthly payments consistently over a shorter interval, such as every 25 days or every four weeks. I doubt that there are many of those.
PUBLIC POLICY REGARDING SIMS
There are two justifiable policies. One is to make SIMs illegal, because the number of consumers who can use one advantageously is miniscule compared to the number who are disadvantaged. A second rational approach would be to require that lenders disclose that the mortgage note can (or cannot) be interpreted as allowing simple interest. Neither approach has been adopted. Borrowers must accept the risk without realizing it, and if it doesn't hit them at the start, it can hit them later if the loan or the servicing of the loan is sold.