Question:

Can you explain compound interest payment on a mortgage?

Answer:

The compound interest payment will be included in a mortgage monthly payment where the lender uses compound interest on the home loan. The other popular way to treat the cost of lending money is the simple interest approach.

Compound Interest Payment And Simple Interest Payment

Compound interest payment means that interest is earned and paid on both principal and interest. There are different compounding periods used by lenders and financial institutions - daily, monthly, quarterly, yearly, etc. The shorter the compounding period, the quicker the interest accrues; hence, it is good to have daily compounding on a savings account, but not on a mortgage loan.

Most mortgages in the U.S. use monthly compounding periods, but not always. Also, there are Simple Interest Mortgages (SIMs), with which you will have a fixed interest earned each day of the mortgage's life.

Therefore, knowing exactly how your mortgage interest is calculated by your lender may help you come up with a repayment plan (such as a biweekly payment schedule or one-time additional annual payment to the principal) to help amortize your mortgage faster.

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