You are refinancing a $200,000 mortgage with a pre-payment penalty of six months of interest at 6.5%. What is the pre-payment penalty?

To calculate the pre-payment penalty for a mortgage with a pre-payment penalty clause, you need to understand how the penalty is determined. In this case, the penalty is based on six months of interest at the interest rate of 6.5% applied to the remaining mortgage balance of $200,000.

First, determine the monthly interest payment.

• The annual interest rate is 6.5%, which translates to a monthly interest rate of 0.065/12 = 0.00541667.

• Next, multiply the mortgage amount by the monthly interest rate: $200,000 * 0.00541667 = $1,083.33.

Now, since the pre-payment penalty is equivalent to six months of interest, you would multiply the monthly interest payment by six:

• $1,083.33 * 6 = $6,500.

Therefore, the total pre-payment penalty comes out to $6,500, making this the correct calculation. It’s crucial to understand that penalties like this are calculated based on the interest that would accrue over a specific timeframe—in this case, six months—rather than a flat percentage of the loan amount or any other arbitrary figure. This reinforces the need to carefully analyze the terms of