Real Estate Basics-Real Estate Math Part 2

Posted by admin on August 22, 2010 under Real Estate License Basics | Be the First to Comment

In part one of the Real Estate Basics – Real Estate Math installment we reviewed how to calculate loan interest and commissions for the purposes of taking the real estate license exam. In part two we will take a look at the calculations behind the figures on the settlement sheet.

Calculating interest due at closing

Much of the math on your real estate license exam will have to do with calculating interest due from the buyer and seller at closing. If the seller has an existing loan on the property it will need to be paid off at closing. The seller is responsible for their loan amount and the interest back to the first of the month. On closing paperwork this is a DEBIT to the seller only. The buyer must secure a new loan and pay the interest up to the end of the month, including the interest for the day of closing.

Let’s say that the seller owes $100,000.00 on their loan on September 1. Since mortgage payments are paid in arrears, that payoff amount remains the same through September 30. If the interest rate on that loan in 6%, and the closing is on the 30^th the equation for the interest due is

$100,000 X .06 = $6000.00 /12 months = $500.00 due from the seller for the month of September.

For a mid month closing, the monthly interest rate translates into a daily rate when divided by 30. So to change our closing to September 15^th, then the buyer owes interest from the day of closing on, 16 days.

$500.00 / 30 = $16.67 per day X 16 days = $266.72 due from buyer at closing.

Calculating taxes

The first step when you are calculating taxes on a settlement sheet is to figure out if the taxes have been paid or not. Next is to determine whether the seller owes a credit or is due a credit and to break the taxes down to a daily number. For the purposes of real estate license math, a month has 30 days and a year is 360 days. In order to calculate the total tax per day, the annual tax amount is divided by 360 days. If the taxes for a property are $2500.00 annually, the equation for the daily tax is

$2500.00 / 360 = $6.95 per day

If the taxes have not been paid in full for the year and the closing happens on September 15 the seller owes tax for 8 months and 15 days, or 255 days, which equals $1772.25. The way that is calculated is

8 months X 30 days = 240 + 15 days = 255 days

255 days X 6.95 per day

This will show on the settlement sheet as a $1772.25 debit to the seller and a $1772.25 credit to the buyer.

In the event that the taxes for the year have been paid in full by the seller then the settlement sheet would show a credit to the seller for $1772.25 and a debit to the buyer in the same amount.