An Illinois mortgage loan of $395,000 closes mid-month, and the lender collects prepaid interest for 10 days at a simple annual interest rate of 7.25%. What is the prepaid interest amount due at closing?
Correct Answer
B) $784.93
$784.93 is correct. Prepaid interest (also called per diem interest) is calculated using the simple interest formula: Loan Amount × Annual Rate ÷ 365 × Number of Days. $395,000 × 0.0725 ÷ 365 × 10 = $78.493... per day × 10 = $784.93. Lenders collect this at closing to cover interest from the closing date through the end of that month, before regular monthly payments begin.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
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