A buyer obtains a loan for $200,000 at 6% annual interest. What is the monthly interest payment for the first month?
Question & Answer
Review the question and all answer choices
$1,200
The figure of $1,200 does not result from any correct application of 6% annual interest to a $200,000 loan — it might arise from incorrectly using a 7.2% annual rate or making an arithmetic error, and it overstates the actual monthly interest by $200.
$1,000
$12,000
The figure of $12,000 represents the correct ANNUAL interest on the loan ($200,000 × 6% = $12,000) but fails to convert it to a monthly figure by dividing by 12 — this is the most common calculation error on this type of question and represents forgetting the final step of the monthly conversion.
$600
The figure of $600 would result from applying a 3% rate (half of 6%) to the full loan amount, or from applying the correct 6% rate to half the loan amount — neither of which reflects the problem's parameters, and this answer may trap test-takers who confuse monthly rate (0.5%) with annual rate (6%) by incorrectly applying 0.5% directly to the annual balance rather than to the monthly balance.
Why is this correct?
The correct monthly interest for the first month is $1,000, calculated by multiplying the principal balance ($200,000) by the annual interest rate (6%) to get annual interest ($12,000), then dividing by 12 months to get the monthly interest ($1,000). This is the standard simple interest calculation used in virtually all residential mortgage products in the United States, and it represents the interest portion of the very first monthly payment before any principal has been repaid. The Truth in Lending Act (TILA, 15 U.S.C. § 1601) requires lenders to disclose this interest calculation methodology in the loan's Annual Percentage Rate (APR) disclosure.
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