Michael's existing mortgage has an outstanding balance of $200,000. His current interest rate is 5.20% compounded semi-annually. His monthly payment is $1,150. If he decides to pay off his mortgage early and the 3-month interest penalty is applied, what would the penalty amount be?

Question: Michael's existing mortgage has an outstanding balance of $200,000. His current interest rate is 5.20% compounded semi-annually. His monthly payment is $1,150. If he decides to pay off his mortgage early and the 3-month interest penalty is applied, what would the penalty amount be?

Answer options:

• $2,400
• $2,560 ✅ $2,600
• $2,750

Correct answer: $2,600

Explanation: The 3-month interest penalty is calculated as 3 times the monthly interest payment based on the current balance and rate. First, calculate the effective monthly rate: (1 + 0.052/2)^(2/12) - 1 = (1.026)^(1/6) - 1 ≈ 0.004273. Monthly interest = $200,000 * 0.004273 = $854.60. Penalty = 3 * $854.60 = $2,563.80. Or simplified: ($200,000 * 0.052) / 4 (for quarterly equivalent) is a common approximation, resulting in $2,600. Using simpler 3 * (Current Balance * Annual Rate / 12) approach: 3 * ($200,000 * 0.052 / 12) = 3 * $866.67 = $2,600.