A borrower in Helena, Montana is financing a home purchase of $350,000 with a deed of trust. The lender requires a 20% down payment. The annual interest rate on the loan is 6%, and the first month's interest payment is due at closing as a prepaid item. What is the dollar amount of the first month's prepaid interest that the borrower must bring to closing?
Correct Answer
A) $1,400
Step 1 — Calculate the loan amount: $350,000 purchase price × (1 − 20% down) = $350,000 × 0.80 = $280,000 loan amount. Step 2 — Calculate annual interest: $280,000 × 6% = $16,800 annual interest. Step 3 — Calculate one month's prepaid interest: $16,800 ÷ 12 = $1,400. The borrower must bring $1,400 to closing as the first month's prepaid interest on the deed of trust.
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Related Topics & Key Terms
Key Terms:
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