Now keep in mind I'm not talking about how compounding works in terms of a savings account, I'm talking about it within this context "Since we're making monthly loan payments, we're going to assume that we're going to compound interest at the end of each month". What is compounding and how does it work with a loan payment examples (NOT a savings account example)

Most US mortgages are amortization mortgages. In a compound mortgage, a portion of the unpaid interest is added to the next intetrest payment. I have never seen one in my years of buying and selling but I have heard or read that Canada uses a compounding scheme.

Compounding means that the interest for the period is added to the balance.

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Originally Posted by ScottGem

Compounding means that the interest for the period is added to the balance.

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Could you please give me an example?

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Originally Posted by ma0641

Most US mortgages are amortization mortgages. In a compound mortgage, a portion of the unpaid interest is added to the next intetrest payment. I have never seen one in my years of buying and selling but I have heard or read that Canada uses a compounding scheme.

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Could you please give me an example?

You borrow 1000 at 5%. Lets say for example's sake that the first month you are charged .05%or $50. So now you owe $1050. Your payment is taken off the $1050.

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Originally Posted by ScottGem

You borrow 1000 at 5%. Lets say for example's sake that the first month you are charged .05%or $50. So now you owe $1050. Your payment is taken off the $1050.

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Thanks!

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Originally Posted by ScottGem

You borrow 1000 at 5%. Lets say for example's sake that the first month you are charged .05%or $50. So now you owe $1050. Your payment is taken off the $1050.

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Sorry to reply again but I just want to know if this is correct for my notes:

So doing the math with the example you've provided (the loan is $1000, the APR is 5%, and the term I'm assuming is 30 years), the monthly payment is $5.00. So instead of the balance being just the principal ($1000), it's the monthly interest, 0.42% (5%/12) and the principal combined. So that would make the balance $1004.20 (4.2, which is .42% of 1000 plus 1000). So now the portion of the $5.00 monthly payment that's interest accounts for 0.42% of the (balance plus interest ($1004.20)). So that would make $4.22 out of the $5.00 go to pay off the interest and $0.78 to pay off the balance, which is now $1003.42 (1004.20 minus 0.78).

Thanks for explaining in advance

By George I think he's got it.

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Originally Posted by ScottGem

By George I think he's got it.

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Lol Thanks for helping! I hope you're not being sarcastic by the way

Google 'amortization tables.' You will see many sites where you can plug in the numbers and get each month for the entire term.