Compounding
Did you know that the advertised interest rate on both a variable or fixed rate mortgage does not represent its real rate of interest?
What is Compound Interest?
Compound interest is just an interest charged upon interest. Compounding in Mortgages are charges up the interest based on the length of different periods (Monthly, Semi-annually, or Annually).
For example in a semi-annually compounding the total Interest charged in month 6 is added to the balance and is compounded, and charged at the end of month 12.
Compounding Semi-Annual vs Monthly
As you can see in the following example comparing the same loan amount and rate, the difference between Semi-Annual and Monthly Compounding will add and extra $852 in interest at the endo of the 5 year term.
It is not a big amount, but as a homebuyer is always good to know the conditions of your mortgage
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