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.
Answer
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.
Explanation
The estimate is 3.75% × $120,000 = $4,500. The actual costs total $5,350, so they are $850 higher; as a percentage of the loan, actual costs are about 4.46%. The difference is about 4.46% − 3.75% = 0.71 percentage points, more than 0.5, so the lender made a poor estimate: choice d.
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