What Are the 4 Types of Compound Interest?
Financial institutions assisting their clients with home loans and mortgage agreements should have a clear understanding of the 4 types of compound interest. The 4 types of compound interest are:
- Daily compounded interest
- Monthly compounded interest
- Quarterly compounded interest
- Annually compounded interest
Daily compounded interest is the fastest way for a borrower to grow their money due to interest being allocated to their accounts every day. The most common types of accounts that use daily compounded interest are savings accounts. The frequency of compounded interest being deposited into the designated account is largely dependent on the mortgage broker and their rules and regulations.
Monthly compounded interest takes longer for a borrower to grow their money than daily compounded interest allows. Monthly compounded interest is calculated based on the borrower’s account on a monthly frequency. Again, the frequency of compounded interest being deposited is dependent on the individual mortgage broker.
Quarterly compounded interest is calculated based on the borrower’s account on a schedule of every 3 months. Quarterly compounded interest is more uncommon than daily and monthly compounded interest, but is still used by the occasional mortgage broker.
Annually compounded interest is calculated based on the borrower’s account on a schedule of once per year. As mentioned previously, it may take a borrower a long time to grow their funds with this interest compounding frequency than the other, shorter options.
Current and potential borrowers interested in learning more about the various types of compounded interest for a mortgage or home loan should reach out to their mortgage broker to inquire about their offerings and requirements.