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.
a. The lender made an excellent estimate; it was equal to the actual closing costs.
b. The lender made a very good estimate; it was within $0.25 \%$ of the actual closing costs.
c. The lender made a fairly good estimate; it was between $0.25 \%$ and $0.5 \%$ of the actual closing costs.
d. The lender made a poor estimate; it was off by more than $0.5 \%$ of the actual closing costs.
Answer (1)
Calculate the estimated closing costs: 0.0375 × 120000 = $4500 .
Calculate the actual closing costs: 300 + 600 + 1250 + 550 + 525 + 125 + 2000 = $5350 .
Calculate the percentage difference: 5350 ∣4500 − 5350∣ × 100 ≈ 15.89% .
Since 15.89% is greater than 0.5% , the lender made a poor estimate: d .
Explanation
Problem Analysis We are given that the lender estimates the closing costs to be 3.75% of the loan amount of $120 , 000 . We need to evaluate how good this estimate is by comparing it to the actual closing costs, which are itemized in the table.
Calculating Estimated Closing Costs First, let's calculate the estimated closing costs. This is 3.75% of $120 , 000 , which can be written as: 0.0375 × 120000 = 4500 So, the estimated closing costs are $4500 .
Calculating Actual Closing Costs Next, we need to calculate the actual closing costs by summing the individual costs listed in the table: 300 + 600 + 1250 + 550 + 525 + 125 + 2000 = 5350 Thus, the actual closing costs are $5350 .
Finding the Difference Now, we find the difference between the estimated and actual closing costs: ∣4500 − 5350∣ = ∣ − 850∣ = 850 The difference is $850 .
Calculating Percentage Difference To evaluate the estimate, we need to find the percentage difference with respect to the actual closing costs. This is calculated as: 5350 850 × 100 ≈ 15.89% The percentage difference is approximately 15.89% .
Evaluating the Estimate Finally, we compare the percentage difference to the options provided: a. The lender made an excellent estimate; it was equal to the actual closing costs. b. The lender made a very good estimate; it was within 0.25% of the actual closing costs. c. The lender made a fairly good estimate; it was between 0.25% and 0.5% of the actual closing costs. d. The lender made a poor estimate; it was off by more than 0.5% of the actual closing costs.
Since 15.89% is much greater than 0.5% , the lender made a poor estimate.
Final Answer Therefore, the lender made a poor estimate; it was off by more than 0.5% of the actual closing costs.
Examples
When taking out a loan, understanding closing cost estimates is crucial for budgeting. For instance, if you're buying a house, knowing whether the lender's estimate is accurate helps you prepare for the actual expenses. If the estimate is significantly off, like in this problem, you might need to adjust your budget or negotiate with the lender. This ensures you're not caught off guard by unexpected costs, making the home-buying process smoother and more predictable.
