Compound Interest

In finance and real estate lending, compound interest refers to interest that is calculated not only on the original principal amount of a loan or investment but also on the accumulated and unpaid interest that has accrued over time. As interest is added to the principal balance, future interest calculations are based on this higher amount, causing the total owed or earned to grow at an increasing rate. Compound interest is commonly applied to long-term loans, savings, and investment accounts, and it can significantly affect the total cost of borrowing or the total return on an investment over time. Understanding how compound interest works is important when evaluating mortgage terms and long-term financial obligations.