Accrued Interest

Financial Dictionary -> Loans -> Accrued Interest

Accrued interest is not a good real estate term and in most cases means a payment that has been made is below the agreed payment. This means the interest left over after the premium was paid accumulates on the loan. This is known as a negative amortization or deferred interest, because it is interest that has been earned and has not been paid.

For the buyer of the property, while they have paid a payment it keeps them from sliding behind, but at the same time it also places this earned interest back on to the loan amount at the end of the loan. This also means that it can add more to the loan amount when calculating the full loan amount.

The interest amount on the loan grows from monthly payment to monthly payment, which is why when making extra payments on the loan amount making them on the principal alone is not enough, because of the accrued interest. This extra paid amount would first be applied to the mounted up interest, with any left over going toward the principal.

Mortgage loans are calculated with daily accrued interest, and are done using a mathematical formula that is 30 days per month with 360 days per year. This accounts for the short month of February and the longer months having 31 days, where no interest is added. This formula also ignores leap years and the system of calculation stays the same. This way of calculating mortgages affects the payment that is made in full when it is paid late, such as the payment that is made 14 days late will have accrued approximately an extra $35.00 dollars in interest.