In obtaining a construction loan, if you borrow $112,000 at 6.25%, how much interest will need to be escrowed?

In obtaining a construction loan, if you borrow $112,000 at 6.25%, how much interest will need to be escrowed?

• A. $7,700.00
• B. $3,500.00
• C. $1,166.67
• D. $563.33

Answer: (C)

To determine how much interest needs to be escrowed for a construction loan of $112,000 at an interest rate of 6.25%, it's essential to calculate the interest for a specific period, which is typically for one year unless stated otherwise. First, the annual interest can be calculated using the formula: \[ \text{Interest} = \text{Principal} \times \text{Interest Rate} \] In this case, the principal is $112,000, and the interest rate is 6.25% (or 0.0625 in decimal). Calculating the annual interest: \[ \text{Interest} = 112,000 \times 0.0625 \] This gives: \[ \text{Interest} = 7,000 \] If you are escrowed for one year, you would escrow this amount or all $7,000. However, often for practical purposes in construction loans, interest might be accrued over a smaller period such as six months. In such situations, only half would be needed, which is $3,500. However, if the question only requires the amount of interest needed in an escrow account perhaps for a shorter timeframe (like a month), then dividing the annual interest

To determine how much interest needs to be escrowed for a construction loan of $112,000 at an interest rate of 6.25%, it's essential to calculate the interest for a specific period, which is typically for one year unless stated otherwise.

First, the annual interest can be calculated using the formula:

[ \text{Interest} = \text{Principal} \times \text{Interest Rate} ]

In this case, the principal is $112,000, and the interest rate is 6.25% (or 0.0625 in decimal).

Calculating the annual interest:

[ \text{Interest} = 112,000 \times 0.0625 ]

This gives:

[ \text{Interest} = 7,000 ]

If you are escrowed for one year, you would escrow this amount or all $7,000. However, often for practical purposes in construction loans, interest might be accrued over a smaller period such as six months. In such situations, only half would be needed, which is $3,500.

However, if the question only requires the amount of interest needed in an escrow account perhaps for a shorter timeframe (like a month), then dividing the annual interest