Answered

A lender estimates the closing costs on a home loan of \$50,000 as listed below.




Closing Cost		Charge

Loan origination		\$200

Title insurance		\$530

Attorney's fees		\$600

Appraisal		\$265

Inspection		\$575

Recording fees		\$130

Escrow		\$800






If the lender's good faith estimates are accurate, are they a reasonable amount for closing costs? Why or why not?


AYes, because the lender estimated 3.08\% of the home loan in closing costs which falls between 3-5\%.
BYes, because the lender estimated 4.6\% of the home loan in closing costs which does not fall between 3-5\%.
CNo, because the lender estimated 6.2\% of the home loan in closing costs which does not fall between 3-5\%.

Verified Answer :

  • Sum the individual closing costs to find a total of \(\$3,100\).
  • Calculate the percentage of the \(\$50,000\) loan that the costs represent: \(\frac{3100}{50000} \times 100 = 6.2\%\).
  • Compare this percentage to the standard \(3-5\%\) range.
  • Conclude that the costs are not reasonable as they exceed the limit: \(\boxed{\text{c}}\).

Explanation

  1. Calculate Total Closing Costs

To determine whether the estimated closing costs are reasonable, we must first calculate the total sum of all individual fees associated with the loan. The listed charges are as follows:

  • Loan origination: \(\$200\)
  • Title insurance: \(\$530\)
  • Attorney's fees: \(\$600\)
  • Appraisal: \(\$265\)
  • Inspection: \(\$575\)
  • Recording fees: \(\$130\)
  • Escrow: \(\$800\)

The total closing cost \(S\) is the sum of these charges:
\[S = 200 + 530 + 600 + 265 + 575 + 130 + 800 = 3100\]
Thus, the total closing cost is \(\$3,100\).

  1. Calculate Percentage of Loan Amount

Next, we calculate the percentage \(P\) that these total closing costs represent relative to the total home loan amount of \(\$50,000\). This is found by dividing the total closing cost by the loan amount and multiplying by \(100\):
\[P = \left(\frac{3100}{50000}\right) \times 100\]
Performing the calculation:
\[P = 0.062 \times 100 = 6.2\%\]
The total closing costs represent \(6.2\%\) of the home loan.

  1. Evaluate Reasonableness and Select the Correct Option

Finally, we evaluate whether this percentage is considered reasonable. The standard range for reasonable closing costs provided is \(3-5\%\) of the loan amount.

Since \(6.2\%\) is greater than \(5\%\), it falls outside the identified range of \(3-5\%\). Comparing this to the given options:

AYes, \(3.08\%\) (incorrect calculation).
BYes, \(4.6\%\) (incorrect calculation).
CNo, because the lender estimated \(6.2\%\) of the home loan in closing costs, which does not fall between \(3-5\%\).

Therefore, statement (c) is the correct evaluation. The final answer is \(\boxed{\text{c}}\).

Examples

Understanding the percentage of closing costs is a vital skill for anyone navigating the real estate market. For instance, if you were planning to buy a property, knowing how to calculate whether the fees are within a reasonable range (typically 3-5%) allows you to assess the financial impact of your mortgage. This simple calculation helps you budget effectively and avoid unexpected financial burdens when finalizing your home purchase.

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