What type of compounding is used in Laurel's second mortgage?

The correct choice is semi-annually not in advance. In mortgage lending, compounding refers to how the interest on the loan is calculated and applied to the outstanding balance. When compounding is semi-annual, it means that interest is calculated and added to the principal twice a year.

This method impacts the overall cost of the loan and how quickly the borrower accumulates interest on the outstanding mortgage balance. It is important to understand the time frame of compounding because it influences the effective interest rate over time.

In the case of semi-annual compounding, the interest is not applied until the end of the compounding period, which is typically favorable for borrowers as it allows them to pay less interest compared to more frequent compounding intervals, such as monthly or quarterly. This characteristic aligns with financial practices concerning second mortgages, which are often designed with specific compounding intervals to suit both lender and borrower preferences.

Understanding the type of compounding used in mortgages is essential for analyzing the cost of borrowing and making informed financial decisions. Monthly, quarterly, or annual compounding each have different implications on how interest is accrued, but for Laurel's second mortgage, the semi-annual not in advance approach effectively meets the outlined terms and conditions.