How do I manage accounting for accrued interest on a mortgage?


Accrued interest is the interest accumulated over the principal. With home loans accrued interest is often termed negative amortization.

If the buyer has opted for a Neg Am ARM, he is making minimum payments not covering the accrued interest and ends up owing more than initially borrowed. In any case the borrower has to keep an eye on this kind of loan, accounting for accrued interest, since the loan will take longer to amortize, not to mention that the suspiciously low monthly payments will skyrocket as soon as the fixed period is over and there might be severe cash penalties for refinancing into another loan.

Have in mind that some of those loans can be deceivingly advertised. If you have gotten into a 1% ARM lured by the possibility of reducing monthly payments for several years you probably did not know each month you might be adding some $400 to your principal, did you? So, make sure you are accounting for the accrued interest on your mortgage before you fall into the trap.

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