The only transaction that works out better for the borrower with a SIM is monthly payments made early. If every month you pay 10 days before the payment is due, for example, you pay off the balance 40 days sooner than the standard mortgage at 6 percent, and 254 days earlier at 12 percent. (I derived these numbers from a SIM spreadsheet that is available on my website.)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.
The moral could hardly be clearer: If you find you have a SIM, you can turn the tables by making sure that every payment is posted by the lender prior to the due date.
How do you know whether or not you have a SIM? You have one if your loan is not amortizing the way a standard mortgage amortizes. Using calculator 2a on my website, enter your initial loan balance, monthly payment and term to generate an amortization schedule. The calculator will also allow you to add extra payments, if you have made any. If the balance reported by your lender in your most recent statement is higher than the balance shown by the calculator by more than a few pennies, you almost surely have a SIM. That would be bad news, but the good news is that you now know what to do about it.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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