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.
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 higher than $0.5\%$ of the actual closing costs.
Answer (2)
Calculate the estimated closing costs: 0.03 × $180 , 000 = $5 , 400 .
Calculate the actual closing costs: $345 + $600 + $1 , 350 + $480 + $550 + $175 + $1 , 900 = $5 , 400 .
Calculate the percentage difference: $5 , 400 ∣$5 , 400 − $5 , 400∣ × 100 = 0% .
The lender made an excellent estimate because the estimated cost was equal to the actual cost. a
Explanation
Calculate Estimated Closing Costs First, we need to calculate the estimated closing costs. The lender estimates the closing costs to be 3% of the loan amount of $180 , 000 . To find this, we multiply the loan amount by 3% or 0.03 .
Estimated Cost Calculation 0.03 × $180 , 000 = $5 , 400
Calculate Actual Closing Costs Next, we need to calculate the actual closing costs by summing all the individual costs provided in the table.
Actual Cost Calculation $345 + $600 + $1 , 350 + $480 + $550 + $175 + $1 , 900 = $5 , 400
Find the Difference Now, we need to find the difference between the estimated and actual closing costs.
Difference Calculation $5 , 400 − $5 , 400 = $0
Calculate Percentage Difference To evaluate the lender's estimate, we need to calculate the percentage difference between the estimated and actual closing costs.
Percentage Difference Calculation $5 , 400 $0 × 100 = 0%
Evaluate the Estimate Since the percentage difference is 0% , the lender's estimate was equal to the actual closing costs. Therefore, the lender made an excellent estimate.
Final Answer The lender made an excellent estimate; it was equal to the actual closing costs.
Examples
Understanding closing costs is crucial when purchasing a home. For example, if you're buying a house and need to budget for these expenses, knowing how to calculate the estimated costs versus the actual costs helps you prepare financially. Suppose a lender estimates your closing costs at 2.5% of a $200 , 000 loan, which is $5 , 000 . If the actual closing costs turn out to be $5 , 200 , calculating the percentage difference ( 5200 ∣5200 − 5000∣ × 100 ≈ 3.85% ) helps you assess the accuracy of the lender's estimate and adjust your budget accordingly. This ensures you're not caught off guard by unexpected expenses during the home buying process.
The lender estimated the closing costs at $5,400 and the actual costs also totalled $5,400. There was no difference between the estimated and actual costs, resulting in a percentage difference of 0%. Therefore, the lender made an excellent estimate, choosing option a.
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