What is Compound Interest?
What is Compound Interest? One of the Wonders of the World! Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. But what does compound interest have to do with homeownership and mortgage financing? Read on to learn about how compound interest works with your mortgage:
Simple Interest
When you finance a home, you typically pay your loan based on simple interest, which accumulates far less quickly than compounding interest. The interest owed each month is based on the remaining balance. As the balance declines, so does the interest paid.
Compound Principal?
OK, maybe this isn’t a common term, but that's what's happening on a regular fixed-rate amortizing loan. The amount of interest you pay declines with the balance, yet because you're making a fixed payment every month, you’re always increasing the amount paid in principal. This works just like the growth curve on the chart shown for compound interest.
Appreciation
If your home's value is up by just 3% every year, the actual dollar value of that increase is more from one period to the next. This is another form of compounding.
Example:
Year 1 $100,000 x 3% = $3,000
Year 2 $103,000 x 3% = $3,090
Year 3 $106,090 x 3% = $3,182
Adding It All Up
It’s no wonder owning a home over time has proven a valuable contributor to building wealth. A progressively less expensive cost of interest and progressively increasing equity is a winning combination that's pretty tough to beat.
MHQ Mortgage Headquarters Is Here To Help!
Securing a good interest rate requires balancing the different factors for your particular scenario. Fortunately, we excel at balancing acts. Let’s work together to discover what viable options are available and whether locking or floating is the right choice for you! If you have any questions about current interest rates or mortgage rate locks at the Lake of the Ozarks, feel free to contact us! MHQ Mortgage HeadQuarters are your mortgage professionals at the Lake of the Ozarks and would be happy to assist you in financing your dream home at the Lake!
Mortgage Headquarters of Missouri, Inc
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
Simple Interest
When you finance a home, you typically pay your loan based on simple interest, which accumulates far less quickly than compounding interest. The interest owed each month is based on the remaining balance. As the balance declines, so does the interest paid.
Compound Principal?
OK, maybe this isn’t a common term, but that's what's happening on a regular fixed-rate amortizing loan. The amount of interest you pay declines with the balance, yet because you're making a fixed payment every month, you’re always increasing the amount paid in principal. This works just like the growth curve on the chart shown for compound interest.
AppreciationIf your home's value is up by just 3% every year, the actual dollar value of that increase is more from one period to the next. This is another form of compounding.
Example:
Year 1 $100,000 x 3% = $3,000
Year 2 $103,000 x 3% = $3,090
Year 3 $106,090 x 3% = $3,182
Adding It All Up
It’s no wonder owning a home over time has proven a valuable contributor to building wealth. A progressively less expensive cost of interest and progressively increasing equity is a winning combination that's pretty tough to beat.
MHQ Mortgage Headquarters Is Here To Help!
Securing a good interest rate requires balancing the different factors for your particular scenario. Fortunately, we excel at balancing acts. Let’s work together to discover what viable options are available and whether locking or floating is the right choice for you! If you have any questions about current interest rates or mortgage rate locks at the Lake of the Ozarks, feel free to contact us! MHQ Mortgage HeadQuarters are your mortgage professionals at the Lake of the Ozarks and would be happy to assist you in financing your dream home at the Lake!
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
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