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Compound interest refers to the accumulation of interest charges that includes interest calculated from interest due.
For example, a $100,000 loan might have a 10% interest. At the end of the first year, the total amount owed would be $110,000 if no payments have been made. At the end of the second year, the new balance would be $121,000. The $10,000 of interest incurred in the first year has generated it’s own interest of $1,000!
Interest charges on home loans in Singapore behave more like simple interest rather than compound interest.
However, there is always a chance for compounding interest when negative amortization occurs.
This occurs when with each monthly payment made by a borrower, the loan principal increases rather than decreases.
The terms of your mortgage would determine how such situations are treated by the lender.
An example of compounding interest is a home equity line of credit. They function like credit lines and overdraft accounts. The balance can rise due to interest charges, and more interest can be charged on the increasing balance.
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