1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. For home loans, this means you pay interest on both the money you've borrowed and the interest that accumulates over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( P \) — Principal amount (USD)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time period in years
• \( Interest \) — Total compound interest (USD)

Explanation: The formula calculates how much interest will accumulate over time when interest is compounded annually.

3. Importance of Compound Interest Calculation

Details: Understanding compound interest helps borrowers see the true cost of a loan over time and make informed decisions about mortgage terms and repayment strategies.

4. Using the Calculator

Tips: Enter principal amount in USD, annual interest rate as a decimal (e.g., 5% = 0.05), and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does compound interest differ from simple interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How often is interest compounded on home loans?
A: Most home loans compound interest monthly, though this calculator assumes annual compounding for simplicity.

Q3: Why is compound interest important for home loans?
A: It shows how much extra you'll pay over the life of the loan, helping you compare different loan options.

Q4: Can I reduce compound interest on my home loan?
A: Yes, by making extra payments, choosing a shorter loan term, or securing a lower interest rate.

Q5: Does this calculator account for monthly payments?
A: No, this calculates total interest assuming no payments are made during the period. For amortization schedules, use a mortgage calculator.