Definition:
The interest accrual rate is the rate at which interest accumulates on a loan balance over time. It determines how quickly interest is added to what a borrower owes, typically calculated daily, monthly, or annually.
Example:
James has a mortgage with a 6% annual interest accrual rate. This means that every day, interest is calculated based on that rate and added to his loan balance unless it’s paid off through monthly installments.
Explanation:
In real estate, when someone takes out a loan—like a mortgage—interest doesn’t just sit still. It accrues, or builds up, over time-based on the interest accrual rate. This rate tells the lender how much interest to charge and how often it should be calculated and added to the borrower’s balance.
Interest can accrue daily, monthly, or annually, depending on the loan terms. For example, daily accrual means the loan balance is updated each day with the interest owed based on that day's balance. This is common in mortgages and home equity lines of credit (HELOCs).
The higher the accrual rate or the more frequently it’s applied, the more interest a borrower pays over time—especially if payments are missed or delayed.
Borrowers can reduce the total interest they pay by making extra payments or paying more than the minimum each month, which lowers the principal faster and slows future interest accrual.
Why is Interest Accrual Rate Important in Real Estate Transactions?
The interest accrual rate is important because it affects the total cost of borrowing. For buyers, it helps determine monthly mortgage payments and how much interest they'll pay over the life of the loan. For sellers, knowing how interest accrues can help explain buyer financing challenges or delays. Understanding this rate is key to managing loan costs effectively.