When assuming an existing loan balance, how is interest calculated for proration at closing?

When assuming an existing loan balance, how is interest calculated for proration at closing?

• A. Total loan balance divided by the loan term
• B. Annual interest on the loan multiplied by the number of days seller owned the property
• C. Monthly payment amount times the number of months owned
• D. Loan balance multiplied by zero if no payments made

Answer: (B)

When assuming an existing loan balance, the correct method for calculating interest for proration at closing involves taking the annual interest on the loan and multiplying it by the number of days the seller owned the property. This method accurately reflects the seller’s ownership time frame and ensures the buyer and seller accurately divide the interest cost based on the actual period of ownership. Proration is important in real estate transactions as it helps determine how much of the interest is attributable to each party based on their ownership duration. Since interest accrues daily, it is essential to calculate it over the exact number of days the seller has held the loan before closing. This approach provides a fair and precise adjustment to the settlement statement at closing.

When assuming an existing loan balance, the correct method for calculating interest for proration at closing involves taking the annual interest on the loan and multiplying it by the number of days the seller owned the property. This method accurately reflects the seller’s ownership time frame and ensures the buyer and seller accurately divide the interest cost based on the actual period of ownership.

Proration is important in real estate transactions as it helps determine how much of the interest is attributable to each party based on their ownership duration. Since interest accrues daily, it is essential to calculate it over the exact number of days the seller has held the loan before closing. This approach provides a fair and precise adjustment to the settlement statement at closing.