How often is mortgage interest compounded?

Answer 1

Hum, I think you would want it to compound monthly. Since your capital is going down monthly, your interest charges would go down every month. If you compound it every 6 months, you end up paying for capital you already paid, 2,3,4 or 5 months before.

If, your capital never goes down then interest charges compounded monthly would be higher instead of semi0annually. Your interest would just add up to your capital, making your next interest charge higher.

Unless, I am mistaken, your mortgage payment is almost always higher then capital + interest cahrges for the month. Therefore, you capital is always decreasing. I have heard of some cases where the payment is lower, but I see how the math would work out (and how the guy would ever pay off his mortgage)

HERE IS THE NOTATION:

NOTATION:

I = Note percentage rate

i = Monthly percentage rate = I/12 (so that the APR = (1+i)^12 - 1)

T = Term in years

Y= I•T

X = ½ I•T = ½ Y

n = 12•T = term in months

L = Principal or amount of loan

P = monthly payment