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 wor...