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Title insurance		\$365

Attorney's fees		\$795

Inspection		\$300

Recording fees		\$120

Escrow		\$980






The actual closing costs were:




Closing Cost		Charge

Loan origination		\$180

Title insurance		\$340

Attorney's fees		\$830

Inspection		\$375

Recording fees		\$150

Escrow		\$1,000






Evaluate the lender's good faith estimate as a percentage of the loan amount.


AThe lender made a very good estimate; it was within $0.25\%$ of the actual closing costs.
BThe lender made a fairly good estimate; it was between 0.25\% and 0.5\% from the actual closing costs.
CThe lender made a somewhat poor estimate; it was between 0.25\% and 0.5\% from the actual closing costs.
DThe lender made a very poor estimate; it was between $0.5\%$ and $0.75\%$ from the actual closing costs.

Verified Answer :

  • Total Good Faith Estimate: \(\$2,560\).
  • Total Actual Closing Costs: \(\$2,875\).
  • Absolute difference: \(\$315\).
  • Percentage of actual costs: \(\approx 10.96\%\).
  • The estimate reflects a significant variance, meaning it is not aligned with the provided options (a-d). \(\boxed{10.96\%}\)

Explanation

  1. Calculating the Total Good Faith Estimate

We need to evaluate the accuracy of the lender's good faith estimate of closing costs compared to the actual closing costs incurred. First, we calculate the total sum of the lender's good faith estimate. Summing the items given (Insurance \(\$365\), Attorney's fees \(\$795\), Inspection \(\$300\), Recording fees \(\$120\), and Escrow \(\$980\)), we obtain a total estimate of \(E = 365 + 795 + 300 + 120 + 980 = \boxed{\$2,560}\).

  1. Calculating the Total Actual Closing Costs

Next, we determine the total sum of the actual closing costs. Summing the items given (Loan origination \(\$180\), Title insurance \(\$340\), Attorney's fees \(\$830\), Inspection \(\$375\), Recording fees \(\$150\), and Escrow \(\$1,000\)), we obtain a total actual cost of \(A = 180 + 340 + 830 + 375 + 150 + 1000 = \boxed{\$2,875}\).

  1. Evaluating the Estimate vs. Actual Costs

We now calculate the difference between the actual closing costs and the estimated costs. The difference is \(\Delta = |2875 - 2560| = \boxed{\$315}\). To evaluate the estimate as requested, we calculate this difference as a percentage of the actual closing costs: \(P = \frac{315}{2875} \times 100\% \approx 10.96\%\). Upon reviewing the options provided, the percentage difference calculated is significantly higher than the ranges mentioned in the options (which are all under 1%). This suggests the question context might be evaluating a different base (loan amount) that is not provided, or the options provided for this specific numerical scenario do not align with standard interpretations. Given the options provided, none fit the calculated result. However, assuming the logic requires choosing based on magnitude, the error is quite large. Note: Since the exact criteria in the question options are not met by the data, we provide the numerical analysis clearly.

Examples

Understanding the variance between estimated and actual costs is essential in financial planning, such as when buying a home or managing project budgets. By calculating the percentage difference between an initial estimate and final expenditure, individuals and professionals can assess the accuracy of their projections and improve future budgeting practices. For example, a homebuyer comparing a 'Good Faith Estimate' to actual closing disclosures uses this exact method to ensure they are prepared for the final financial commitment.

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