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A lender estimates the closing costs on a home loan will be $3.75\%$ of the loan amount of $\$120,000$. The actual closing costs are listed below.




Closing Cost		Charge

Loan origination		\$300

Title insurance		\$600

Attorney's fees		\$1,250

Appraisal		\$550

Inspection		\$525

Recording fees		\$125

Escrow		\$2,000






Evaluate the lender's good faith estimate.


AThe lender made an excellent estimate; it was equal to the actual closing costs.
BThe lender made a very good estimate; it was within 0.25\% of the actual closing costs.
CThe lender made a fairly good estimate; it was between 0.25\% and 0.5\% of the actual closing costs.
DThe lender made a poor estimate; it was off by more than $0.5\%$ of the actual closing costs.

Verified Answer :

  • The lender's estimated cost is \(\$4,500\), calculated as \(3.75\%\) of \(\$120,000\).
  • The actual closing costs total \(\$5,350\).
  • The absolute difference is \(\$850\), which represents approximately \(0.708\%\) of the loan amount.
  • Because \(0.708\% > 0.5\%\), the lender's estimate was off by more than \(0.5\%\), meaning it was a poor estimate. The correct choice is \(\boxed{d}\).

Explanation

  1. Evaluating the Closing Costs Estimate

To evaluate the lender's good faith estimate, we first need to determine the amount the lender estimated and compare it to the actual total of closing costs. The loan amount is \(\$120,000\), and the lender estimated the closing costs to be \(3.75\%\) of this amount. Thus, the estimated cost \(E\) is calculated as:
\[E = 0.0375 \times \$120,000 = \$4,500.\]
Next, we calculate the total actual closing costs \(A\) by summing the charges provided:
\[A = \$300 (\text{Loan origination}) + \$600 (\text{Title insurance}) + \$1,250 (\text{Attorney's fees}) + \$550 (\text{Appraisal}) + \$525 (\text{Inspection}) + \$125 (\text{Recording fees}) + \$2,000 (\text{Escrow}) = \$5,350.\]
The difference \(D\) between the actual costs and the estimate is:
\[D = |A - E| = |\$5,350 - \$4,500| = \$850.\]
Finally, to determine how this error relates to the loan amount, we calculate the percentage difference \(P\) relative to the loan amount of \(\$120,000\):
\[P = \left( \frac{D}{\$120,000} \right) \times 100\% = \left( \frac{\$850}{\$120,000} \right) \times 100\% \approx 0.708\%.\]
Since \(0.708\% > 0.5\%\), the estimate was off by more than \(0.5\%\) of the loan amount. Comparing this to the given options, the correct descriptor is that the lender made a poor estimate.

Examples

Understanding how to verify financial estimates is a critical life skill. Whether you are buying a home, planning a renovation, or managing a budget, comparing estimated costs against actual expenses helps you spot discrepancies early and make informed financial decisions. This process is fundamental in personal finance and real estate management, ensuring that you are not caught off guard by unexpected fees or miscalculations.

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