Illinois Real Estate Practice Exam

What is the borrower's interest rate if the interest charge for the previous month on a $175,000 loan was $875?

1. 4%

2. 5%

3. 6%

4. 7%

The correct answer is: 6%

To determine the borrower's interest rate from the given monthly interest charge and loan amount, you'll need to apply a straightforward calculation using the formula for interest. First, you understand that interest is calculated as a percentage of the principal (loan amount). The formula for monthly interest is: \[ \text{Interest} = \text{Loan Amount} \times \text{Interest Rate per Month} \] Given that the interest charge for the previous month was $875, and the loan amount is $175,000, you can set up the equation: \[ 875 = 175,000 \times \text{Interest Rate per Month} \] To find the interest rate per month, rearranging the equation gives: \[ \text{Interest Rate per Month} = \frac{875}{175,000} \] This calculation results in: \[ \text{Interest Rate per Month} = 0.005 \] To convert this monthly interest rate into an annual interest rate, multiply by 12 (since there are 12 months in a year): \[ \text{Annual Interest Rate} = 0.005 \times 12 = 0.06 \text{ or } 6\% \