Final answer:
The proration calculation involves determining the daily interest on the outstanding mortgage balance and multiplying it by the number of days the buyer is responsible for, including the closing date. The interest for the mortgage with a principal of $197,000 at 4% from July 14 to July 31 (18 days) amounts to approximately $388.62, which is listed on the closing disclosure under the buyer's debits.
Step-by-step explanation:
When buying a house and assuming a seller's mortgage, proration at closing involves calculating the interest that accrues on the outstanding loan balance up to the closing date. Since the closing date is July 14 and the buyer is assuming a mortgage with a principal balance of $197,000 at 4% interest, we must calculate the daily interest charge and multiply by the number of days including the closing date for which the buyer will be responsible.
The daily interest can be calculated by first finding the annual interest ($197,000 × 0.04), which amounts to $7,880. The daily interest rate is then ($7,880 / 365), which gives us approximately $21.59 per day. Assuming July has 31 days, the buyer would be responsible from July 14 to July 31, which is 18 days of interest. Therefore, the proration would be 18 days × $21.59, totaling approximately $388.62.
This amount is entered on the closing disclosure under the buyer's debits as 'Prepaid Interest' and represents the interest the buyer will need to pay upfront for the time period from the closing date through the end of that month.