What is Accrued Interest?

Accrued interest can have two different meanings, depending on the context. With a savings account or similar bond investment, accrued interest is the interest income that your money has accrued over time.

In the mortgage arena, accrued interest refers to a loan’s interest charges that the borrower owes to the lender. With an interest-only loan, for example, the minimum monthly payments due each month are the interest that has accrued on the current principal balance. Or if you fall behind on your mortgage loan, the unpaid interest will also accrue and will come due.

Some mortgage loans, however, have monthly payments that don’t come close to paying the interest accrued during the month. Option ARMs or “pick a payment” loans are the most common types of these negative amortization loans. The minimum monthly payments on these programs aren’t enough to pay the interest due. But don’t make the mistake of thinking that you won’t have to pay them! These unpaid interest charges accrue and are then added to the loan principal. These are generally awful programs because your principal balance goes up instead of down—causing negative amortization.

For more information, see also the following entries:

• :Adjustable-Rate Mortgage Loan:
• :ARM Loan:
• :Bond:
• :Interest:
• :Interest-Only Loan:
• :Mortgage:
• :Mortgage Loan:
• :Negative Amortization:
• :Option ARM Loan:
• rincipal Balance: