One of the questions I routinely receive is that of the difference between simple interest and compound interest. Understanding these interest rate terms can give you a better understanding of mortgage loans, as well as other types of loans.

Simple interest: Interest is paid on the principal balance of the loan only.

Compound interest: Interest is also paid on the interest of the principal.

Compound interest is an interesting concept. The Daily Herald explains the difference between simple and compound interest:

Suppose a bank pays an annual rate of 3 percent, or 0.25 percent a
month. On a $100,000 deposit, the account would earn $250 in month one.
If it were a simple-interest account, the bank would also pay $250 in
month two. If it were a compound-interest account, it would pay
interest of $250.60 in month two, the 60 cents being the interest on
the $250 earned in month one.