Question

Say that you (or your parents) are purchasing a house for $235,000 and have an excellent credit score. If you pay $1,678.93 at the end of the first month, how much is applied to the principal balance?

A) Excellent 4.75 5.50 Good 5.00 5.90
B) Average 5.85 6.75
C) Fair 6.40 7.25
D) Poor 7.50 8.40 $685.25 $721.19 $748.72 $616.29

Answer 1

The correct answer is option C) $721.19. To calculate the amount applied to the principal balance, we need to subtract the interest portion from the total payment.

Step-by-step explanation:

The correct answer is option C) $721.19.

To calculate the amount applied to the principal balance, we need to subtract the interest portion from the total payment.

First, we need to calculate the interest. We do this by multiplying the outstanding principal balance by the interest rate. In this case, since the credit score is excellent, the interest rate is 4.75%. So, the interest for the first month is $235,000 * 4.75% = $11,162.50.

Next, we subtract the interest from the total payment to get the amount applied to the principal balance. So, $1,678.93 - $11,162.50 = -$9,483.57.

Since the result is negative, it means that the amount applied to the principal balance is $0, and the remaining amount is used to cover the interest.