Compounding interest on semiannually paid bills means that the principle of an initial loan or other investment in the beginning of the compound term, that is, each six month period, includes the interest accrued in each previous period. In some cases, the interest charged on a mortgage loan or similar investment may be compounded semiannually.
In simple terms, compound interest refers to the increase in the value of an asset due to the accumulation of interest. In most cases, an interest-only mortgage loan allows the borrower to pay an annual fee. The interest only portion of an interest only mortgage loan is not compounded annually.
Interest on a mortgage loan is figured into the principal balance each month, but interest compounded on an interest only mortgage loan is figured only annually. For example, a home owner has taken out a fixed rate loan at a given rate of interest and then decided to add additional interest only for five years. The five years are the first six-month periods of the fixed rate loan, which have been with the borrower for two and a half years, and the interest only is figured at that time. When the home owner has reached his five-year anniversary of the mortgage, he can start adding the interest only part of the mortgage to the original interest rate.
If interest is added to the mortgage interest each year, it is called compounded interest. Interest is figured into the principal balance of all loan or other investment payments, whether interest only, or in addition to principal and interest. Compounded interest is computed to include both the principal and interest that accrue each month.
Compound interest takes into account the fact that when you take out a mortgage, you typically pay a fixed monthly principal. A fixed interest only mortgage loan allows you to borrow more money than the original loan at a much lower interest rate. With compounding, the original interest only principle can be further reduced over time. This results in a decreasing amount that you pay each month to borrow.
Some compounding may occur when you make any changes to your loan, including adding payments, such as a new credit card or loan line, or changing your employment status. You may also receive an increase in your credit line or credit limit if you have established a good payment history on a certain loan type.
Interest is figured only once per year and the principal will not change until the following year. If you use the interest only term, the interest only component of your loan will be deducted from your original principal balance each month.
There is no limit on how much interest can accumulate or when you can begin using the interest only term, and there is no minimum amount that must be paid. Interest can be accumulated by keeping track of your payment dates.
Interest only mortgages have become a popular option for people who wish to borrow but do not need the security of a loan to back up the loan amount. Interest only mortgage loans are good for a shorter period of time than a traditional fixed rate mortgage, and it is possible to refinance if the interest only term is used.
Homeowners have several options when selecting the interest only period for their home. Interest only mortgages are available for those who are still in the process of purchasing a home. A home owner can opt to purchase a home, but have not yet made the closing on the property and purchase an interest only mortgage to pay the mortgage.
Interest only mortgages have also become popular with those who are just looking to purchase a house but have less than perfect credit. They can purchase a home with the option to add a down payment on to purchase in the future.
Interest only mortgages also make it easy to purchase a home for those who have credit problems, because the down payment will be less. If they later decide to purchase a home, they will still be able to make their payments each month, even if they did not make the down payment to start the home out.