Ethical Homes

Interest is a charge paid for the right to use someone else’s money.

Mortgage Loan Interest

In the context of mortgage loans, more specifically, interest is the amount that a borrower pays to a lender to compensate that lender for the use of the lender’s money (in the form of a mortgage loan) to purchase the borrower’s new home, and is usually determined as a percentage of the loan amount.

Simple vs. Compound Interest

Simple interest is interest that is calculated once, at the start of a loan, based on the original principal balance. Most mortgage loans use compound interest, which is recalculated periodically to take into account changes in the outstanding principal balance; compound interest payments are usually pre-calculated for the life of the loan assuming regular payments, and then amortized to make the total of each month’s principal and interest payments stay the same over the life of the loan.

Accrued and Capitalized Interest

Accrued interest is the term for the sum of all past-due interest payments. For many loans (such as option ARMs) that allow payments of less than the minimum amount of interest owed, accrued interest can be subject to capitalization of interest; when accrued interest is capitalized, it is added to the outstanding principal balance, increasing both the total amount owed and the amount against which future compound interest payments may be calculated.