How is interest calculated on a mortgage loan?

Interest on a mortgage loan is typically calculated on the remaining balance of the loan, which reflects the actual amount owed. This method allows for the interest to decrease as the borrower makes payments since the loan balance is reduced over time. Compounding monthly means that the interest accrued each month is added to the outstanding balance, leading to a more accurate reflection of the amount owed. This method is standard because it accounts for the effective cost of borrowing over the life of the loan, making it beneficial for both lenders and borrowers.

Other methods, such as calculating interest as a flat fee based on the original loan amount, do not consider the impact of principal payments, making them less common in practice. Additionally, calculating interest only at the end of the loan term or on a weekly basis based on market rates is not typical in most mortgage arrangements, which rely on predictable, consistent monthly payments.