## Does Mortgage Interest Compound?
When you take out a mortgage, you borrow money from a lender to buy a home. The loan is secured by the property, and you agree to repay the principal (the amount you borrowed) plus interest (the cost of borrowing the money) over a set period of time, typically 15 or 30 years.
**Simple interest** is calculated on the principal amount only. So, if you borrow $100,000 at a 5% interest rate, you would pay $5,000 in interest in the first year. In the second year, you would still pay $5,000 in interest, even though you have already paid some of the principal.
**Compound interest** is calculated on the principal amount plus any unpaid interest. So, if you borrow $100,000 at a 5% interest rate, you would pay $5,000 in interest in the first year. In the second year, you would pay $5,250 in interest ($5,000 x 1.05). This is because the interest is calculated on the $100,000 principal plus the $5,000 in unpaid interest from the first year.
**Does mortgage interest compound?**
Yes, mortgage interest compounds. This means that the interest you pay in the first year is added to the principal, and the interest you pay in the second year is calculated on the principal plus the unpaid interest from the first year. This can make a big difference in the total amount of interest you pay over the life of your loan.
For example, if you borrow $100,000 at a 5% interest rate for 30 years, you will pay $164,080 in interest if the interest is simple. However, if the interest is compound, you will pay $232,365 in interest. That’s a difference of $68,285!
**How can I avoid paying compound interest on my mortgage?**
There are a few things you can do to avoid paying compound interest on your mortgage:
* **Make extra payments.** If you make extra payments on your mortgage, you will reduce the principal balance faster. This will mean that less interest will be added to the principal each year, and you will pay less interest overall.
* **Refinance your mortgage.** If you can get a lower interest rate on your mortgage, you may be able to save money on interest. However, it’s important to factor in the costs of refinancing, such as closing costs and appraisal fees.
* **Get a shorter loan term.** If you choose a shorter loan term, you will pay less interest overall. However, your monthly payments will be higher.
**Conclusion**
Mortgage interest compounds, which can make a big difference in the total amount of interest you pay over the life of your loan. However, there are a few things you can do to avoid paying compound interest and save money on your mortgage.