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Question #1
If the seller's bank received the principal balance due of $56,818, interest of $568.18 and a 1%
prepayment penalty at closing, what was the total amount received by the seller's bank?
Just add up all the charges!
a. $56,818 b. $57,386.10 c. $57,954.36 d. $57,348
Try to figure out this question before going on to the following page.
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Question #1 Solution
If the seller's bank received the principal balance due of $56,818, interest of $568.18 and a 1%
prepayment penalty at closing, what was the total amount received by the seller's bank?
Just add up all the charges!
a. $ 56,818 b. $ 57,386.10 c. $ 57,954.36 d. $ 57,348 Correct Answer: C
• Step 1 Add up the principal balance and the interest amount that is due at closing. ($56,818 + $568.18
= $57,386.18
• Step 2 The seller also owes a 1% prepayment penalty on the loan amount. ($56,818 × 1% = $568.18 the amount of the prepayment penalty.
• Step 3 Added together, the seller owes $57,954.36 to the lender at closing.
The next question is on the following page.
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Question #2
The sale price on a property was $1,000,000. The seller's loan balance on the day of closing was
$853,502.50. The seller's lender is charging a 2% prepayment penalty. How much does the seller owe the bank for the prepayment penalty?
a. $20,000.00 b. $17,070.05 c. $15,000.70 d. $12,000.50
Remember to attempt to solve this on your own before going on to the next page.
Remember: Prepayment penalties are always paid on the loan balance the day of closing.
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Question #2 Solution
The sale price on a property was $1,000,000. The seller's loan balance on the day of closing was
$853,502.50. The seller's lender is charging a 2% prepayment penalty. How much does the seller owe the bank for the prepayment penalty?
a. $20,000.00 b. $17,070.05 c. $15,000.70 d. $12,000.50
Correct Answer: B
• Step 1 The sale price is a detractor in this question.
• Step 2 The loan amount × the percentage of the prepayment penalty will yield the amount owed at closing. ($853,502.50 × 2% = 17,070.05)
Remember: Prepayment penalties are always paid on the loan balance the day of closing.
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Question #3
The sale price on a property was $175,000. The seller's loan balance after the September 1 payment was $80,575. The monthly payment on the loan has been $750 principal and interest for the past 12 years. The interest rate on the loan is 8.5%. The property has been sold and the closing will occur on September 15. The seller's bank is demanding to be paid interest through the month of settlement, and a 1% prepayment penalty. How much will the seller owe the bank at closing?
Take a piece of scratch paper and prepare debit and credit columns. The problem is giving you most of the necessary numbers. In fact, there are numbers that you don't need! Watch out for "Interest through the month of settlement."
360 day method choices:
a. $80,575 b. $81,325.05 c. $81,951.49 d. $83,000.42
365 day method choices:
a. $80,575 b. $81,137.92 c. $81,943.67 d. $83,000.42
Try to solve this one on your own before moving onto the next page for our answer.
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Question #3 Solution
The sale price on a property was $175,000. The seller's loan balance after the September 1 payment was $80,575. The monthly payment on the loan has been $750 principal and interest for the past 12 years. The interest rate on the loan is 8.5%. The property has been sold and the closing will occur on September 15. The seller's bank is demanding to be paid interest through the month of settlement, and a 1% prepayment penalty. How much will the seller owe the bank at closing?
Take a piece of scratch paper and prepare debit and credit columns. The problem is giving you most of the necessary numbers. In fact, there are numbers that you don't need! Watch out for "Interest through the month of settlement."
a. $80,575 b. $81,325.05 c. $81,951.49 d. $83,000.42
Correct Answer: C Read the last sentence first. The question is asking how much the seller owes the bank at closing.
• Step 1 The sale price is a credit to the seller.
• Step 2 mber 1st payment is $80,575. So the loan balance stays
the same for the entire month of closing, which is September. Debit to the seller.
• Step 3 The monthly payment is a detractor and of no use in this problem.
• Step 4 The bank is demanding interest through the month of closing. $80,575 × 8.5% = $6,848.88 interest a year divided by 12 = $570.74 interest owed for the month of September. Debit the seller.
• Step 5 A 1% prepayment penalty $80,575 × 1% = $805.75 Debit the seller.
• Step 6 Add up the debits $80,575 + $570.74 + $805.75 = $81,951.49.
115 a. $80,575
b. $81,137.92 c. $81,943.67 d. $83,000.42
Correct Answer: C Read the last sentence first. The question is asking how much the seller owes the bank at closing.
• Step 1 The sale price is a credit to the seller.
• Step 2
the same for the entire month of closing, which is September. Debit to the seller.
• Step 3 The monthly payment is a detractor and of no use in this problem.
• Step 4 The bank is demanding interest through the month of closing. $80,575.00 × 8.5% = $6,848.88 interest a year divided by 365 days = $18.76 a day interest × 30 days = $562.92 owed for the month of September. Debit the seller.
• Step 5 A 1% prepayment penalty $80,575 × 1% = $805.75 Debit the seller.
• Step 6 Add up the debits. $80,575 + $562.92 + $805.75 = $81,943.67 Answer C
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Question #4
The seller's loan balance after the April 1 payment was $96,775.42. The principal and interest payment due on the first of each month was $725.48, at an interest rate of 6.75%. The bank is demanding a 2%
prepayment penalty at closing which is set for June 15. How much is the prepayment penalty, and how would it appear on a settlement statement?
.
360 day method choices:
a. $1,935.51 - Credit the seller.
b. $1,931.89 - Debit the seller.
c. $1,929.49 - Credit the seller.
d. $1,928.24 - Debit the seller.
365 day method choices:
a. $1,935.51 - Credit the seller.
b. $1,931.73 - Debit the seller.
c. $1,929.49 - Credit the seller.
d. $1,928.30 - Debit the seller.
Remember to attempt to solve this on your own first.
This is another good example of why you should always read the last sentence first when doing math problems! Don't forget: The loan balance must be reduced by two months before figuring the prepayment penalty
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Question #4 Solution
The seller's loan balance after the April 1 payment was $96,775.42. The principal and interest payment due on the first of each month was $725.48, at an interest rate of 6.75%. The bank is demanding a 2%
prepayment penalty at closing which is set for June 15. How much is the prepayment penalty, and how would it appear on a settlement statement?
a. $1,935.51 - Credit the seller.
b. $1,931.89 - Debit the seller.
c. $1,929.49 - Credit the seller.
d. $1,928.24 - Debit the seller.
Correct Answer: D This is another good example of why you should always read the last sentence first when doing math problems! Don't forget: The loan balance must be reduced by two months before figuring the prepayment penalty. Be sure to read the last sentence first to determine that you are only concerned in this question with the prepayment penalty.
• Step 1 $96,775.42 × 6.75% = $6,532.34 a year divided by 12 = $544.36 interest paid on May 1 for April.
• Step 2 $725.48 principal and interest payment minus $544.36 interest = $181.12 principal reduction paid May 1 in arrears for April.
• Step 3 $96,775.42 $181.12 = $96,594.30 principal balance on May 1 and for the entire month.
• Step 4 Now repeat the same process to discover the loan balance on June 1st - $96,594.30 × 6.75% =
$6,420.12 ÷ 12 = $543.34 interest for the month of May paid on June 1 in arrears.
• Step 5 $725.48 principal and interest minus $543.34 interest = $182.13 principal reduction paid on June 1 for the month on May.
• Step 6 $96,594.30 $182.13 = $96,412.17 principal balance on June 1st and at closing on June 15.
• Step 7 $96,412.17 × 2% prepayment penalty = $1,928.24.
This is another good example of why you should always read the last sentence first when doing math problems! Don't forget: The loan balance must be reduced by two months before figuring the prepayment penalty
118 a. $1,935.51 - Credit the seller.
b. $1,931.73 - Debit the seller.
c. $1,929.49 - Credit the seller.
d. $1,928.30 - Debit the seller.
Correct Answer: D Again, be sure to read the last sentence first to determine that you are only concerned in this question with the prepayment penalty. However, you must figure out the loan balance after the June 1st payment.
• Step 1 $96,775.42 × 6.75% = $6,532.34 a year divided by 365 = $17.90 a day × 30 days = $536.90 interest paid on May 1 for April.
• Step 2 $725.48 principal and interest payment minus $544.36 interest = $188.58 principal reduction paid May 1 in arrears for April.
• Step 3 $96,775.42 $188.58 = $96,586.84 principal balance on May 1 and for the entire month.
• Step 4 Now repeat the same process to discover the loan balance on June 1. $96,586.84 × 6.75% =
$6,519.61 ÷ 365 days = $17.86 a day × 31 days = $553.72 interest for the month of May paid on June 1 in arrears.
• Step 5 $725.48 principal and interest minus $553.72 interest = $171.76 principal reduction paid on June 1 for the month on May.
• Step 6 $96,586.84 $171.76 = $96,415.08 principal balance on June 1 and at closing on June 15.
• Step 7 $96,415.08 × 2% prepayment penalty = $1,928.30.
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