Question:

Definition of Accrued Interest

Answer:

Accrued interest is the interest that is earned but not paid. It is often used to denote negative amortization of adjustable rate loans and can also be called deferred interest.

Accrued interest may denote just accumulation of interest over any period of the loan term. However, within mortgage glossary terms, accrued interest most often refers to interest added to the principal when the monthly payments are below interest-only payments.

When taking an ARM, you have the option to choose between a minimum payment, interest-only and interest plus some principal. These options are offered to keep your payments low and free some cash. However, do not stick to minimum payment only, as this will inflate your principal. Rather, make at least interest-only payments to cover the accrued interest. Anything you agree to pay over the accrued interest will go towards the principal.

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