Compound Interest

Compound Interest — unlike simple interest, which is calculated only on the original principal, compound interest factors in previously accumulated interest as part of the base for future calculations. The frequency of compounding — daily, monthly, or annually — determines how quickly the balance grows.

For mortgage note investors, understanding compound interest is critical when evaluating notes with accrued but unpaid interest. On a non-performing loan where payments have stopped, compounding can significantly inflate the total amount owed. This distinction also matters when calculating yields on performing notes, since the effective return depends on how interest compounds over the remaining term.