How does interest accrual work in a mortgage?

Interest accrual in a mortgage typically operates on a daily basis, calculated on the outstanding principal balance. This means that every day, interest is accumulated based on the remaining amount of the loan, and it is usually calculated using an interest rate presented in an annual percentage rate (APR). This daily accrual is significant because it reflects the true cost of borrowing over time.

For instance, if you were to make a payment towards your mortgage, the interest that accrues from one day to the next can vary, depending on how many days have passed since the last payment was made. This is crucial for borrowers to understand, as any delays in making payments can lead to a higher accumulated interest cost over time.

In the context of the other choices, while it's true that interest accrual may be reflected monthly in the payment schedule, the daily calculation on the outstanding principal is what ultimately determines how much you owe over the life of the loan. Interest is not calculated based solely on annual payments or withheld until a payment is due; rather, it continuously accumulates based on the daily remaining balance, leading to the comprehensive understanding that daily accrual is essential in mortgage finance.