In a different question it is stated that

Mortgages are compounded .. 12 times a year in the USA

Is this true or just applicable to that question?

I am looking at a site where it explains how to convert APR to APY on basis of the type of compounding, and I am not getting the same number the bank is trying to offer. When I asked the loan officer what kind of compounding the loan has, they did not understand or pretended not to.

So the main question is do mortgages in the US offer monthly compounding or can they have daily/infinite compounding?

  • 3
    Perhaps if you posted the numbers, we'd be able to figure out what method they're actually using, regardless of whether they should be using that method or not.
    – Patrick87
    Commented Feb 10, 2020 at 19:05
  • 5
    Loan officers are sales people, he probably did not understand.
    – Pete B.
    Commented Feb 10, 2020 at 19:30
  • interesting thefinancebuff.com/…
    – puzzled
    Commented Feb 10, 2020 at 20:05
  • 1
    @patrick87 Interest rate 2.75% and APR 3.436% and for a loan of $100K the principal & Interest is showing as $408.24 ( and matches with PMT(2.75%/12,360,-100000), so I am wondering which formula will use 3.436% ?
    – puzzled
    Commented Feb 10, 2020 at 22:44

1 Answer 1


Actually, mortgages do not "compound" at all. Compounding means that interest is charged on top of past interest, which is not true for mortgages. Conforming mortgages in the US use simple interest, where interest is calculated based on the principal amount remaining, and late/unpaid interest is not added to the principal (unlike a credit card, for example).

Mortgages are typically amortized based on 12 equal monthly payments (with some exceptions like bi-weekly or semi-monthly mortgages), and the periodic interest used to amortize the monthly payment would be 1/12 of the "annual" interest that is quoted.

  • 2
    Is there a law or regulation you're aware of that requires amortization with twelve monthly payments? Or that the interval at which interest is charged be equivalent to the interval at which payments are regularly scheduled? I tend to agree that monthly payments with monthly interest equal to a twelfth of the quoted APR is all I've ever heard of but it could be otherwise.
    – Patrick87
    Commented Feb 10, 2020 at 19:41
  • @Patrick87 If you squint, the Fannie Mae Freddie Mac Uniform Instrument is a regulation of the Federal Housing Finance Agency
    – user662852
    Commented Feb 10, 2020 at 20:36
  • 1
    @Patrick87 there's no law that requires it, but it's required for conforming loans, and as such, lenders generally just follow suit for non-conforming loans too. There certainly have been banks that offered mortgages that were not configured in that manner.
    – dwizum
    Commented Feb 10, 2020 at 20:49
  • 2
    I don't know about specifics of U.S in that matter - but here you get to choose from 2 models - constant rate and annuity rate ... the difference is constant rate means you pay x to reduce the mortgage and y for the interest - x remains constant, y slowly goes down. while annuity rate means that the sum of x and y remains a constant thus the rate you pay back the mortgage accelerates over time.
    – eagle275
    Commented Feb 11, 2020 at 12:29
  • @eagle275 in the US fixed rate mortgages (the most common type) also have a fixed payment amount, initially almost all interest, eventually almost all principal, extra payments here will shorten the duration of the mortgage. Adjustable rate mortgages change the rate based on changes of the market interest rate every year or every several years, each time they do so the payment is recalculated to complete the payoff at the end of the headline term, the share of the payment to principal will go up over time, the share to interest will have an overall decline but will go up/down with rate change Commented Feb 11, 2020 at 15:41

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