10 Things You Need to Know about Compound Interest

Professional financial institutions are in a unique professional position. With the ability to provide expert assistance and recommendations to their clients throughout the loan research and homebuying process, mortgage brokers are an essential piece of the home-buying puzzle. In this article, we will discuss the 10 things you need to know about compound interest.

1. What is Compound Interest?

Compound interest is the interest being paid on a home loan’s initial principal amount, along with the accumulated interest on the borrowed funds. Essentially, compound interest is the interest that a borrower will be earning on interest. 

2. How is Compound Interest Calculated?

Compound interest is calculated by adding 1 to an existing interest rate (expressed as a decimal), raised to the power of the ‘years’ the borrower will be earning interest for, multiplied by the principal amount. Or, the following equation can be used!

pricipal (1+interest rate) years= balance 

3. How Does Compound Interest Work?

We now know that compound interest is essentially interest being earned on interest, but how does it work? Well, compound interest is generally paid by a mortgage broker to their borrowing client which is placed into a specific account. The interest put into the specific account will then begin to accumulate interest as well.

4. Who Does Compound Interest Benefit?

Compound interest can benefit anyone! In fact, with a good compound interest rate, an individual can accumulate an impressive amount of funds. 

5. Are There Varying Compound Interest Frequency Schedules?

Yes, there are 4 types of frequency schedules, daily, monthly, annually, and fortnightly.

6. What is a Benefit of Compound Interest?

Compound interest can benefit a borrower by increasing their funds quicker than without, depending on the individual situation.

7. Will All Mortgages Have Compound Interest?

No, traditional mortgages will generally not have a compound interest as an available option. 

8. How Can a Borrower Obtain a Mortgage With Compound Interest?

A borrower should reach out to their current or potential mortgage broker to discuss the possibility of obtaining a mortgage with compound interest and keep their options open.

9. Will a Mortgage Interest Rate be Compounded Monthly?

The interest rate of a standard mortgage agreement will not compound monthly unless specified otherwise by the borrower’s mortgage broker.

10. What is a Disadvantage of Mortgage Compound Interest?

A disadvantage of mortgage compound interest is that it can be more expensive than some borrowers realize, especially if they do not keep track of their funds.