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A lender estimates the closing costs on a home loan will be $3\%$ of the loan amount of $\$180,000$. The actual closing costs are listed below.




Closing Cost		Charge

Loan origination		\$345

Title insurance		\$600

Attorney's fees		\$1,350

Appraisal		\$480

Inspection		\$550

Recording fees		\$175

Escrow		\$1,900






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 higher than $0.5\%$ of the actual closing costs.

Verified Answer :

  • Calculate the estimated closing costs: \(3\% \times \$180,000 = \$5,400\).
  • Calculate the total of the actual closing costs: \(\$345 + \$600 + \$1,350 + \$480 + \$550 + \$175 + \$1,900 = \$5,400\).
  • Compare the estimate to the actual total; since they are identical (\(\$5,400 = \$5,400\)), the estimate is excellent.
  • Select the option: \(\boxed{a}\).

Explanation

  1. Evaluating the Lender's Estimate

To evaluate the lender's good faith estimate, we first calculate the estimated closing costs and compare them to the actual sum of the expenses listed. The loan amount is \(\$180,000\), and the lender estimates the closing costs as \(3\%\) of this amount. The estimated cost is calculated as follows:
\[0.03 \times \$180,000 = \$5,400.\]
Next, we calculate the total of the actual closing costs by summing all the individual charges:
\[\$345 + \$600 + \$1,350 + \$480 + \$550 + \$175 + \$1,900 = \$5,400.\]
Comparing these two values, we see that the estimate of \(\$5,400\) is exactly equal to the total of the actual closing costs of \(\$5,400\). The percentage difference is:
\[\left|\frac{\$5,400 - \$5,400}{\$5,400}\right| \times 100\% = 0\%.\]
Since the estimate is exactly equal to the actual total costs, it is an excellent estimate. Therefore, the correct option is a.

Examples

Understanding how to verify closing costs is essential in real estate transactions. When a lender provides a Good Faith Estimate (now part of a Loan Estimate), comparing it against final closing costs helps borrowers ensure they are being charged accurately and provides a foundation for financial planning. This simple percentage comparison is a practical application of basic arithmetic used in daily personal finance management.

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