Question

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
title insurance	$600
attorneys fees	$1,250
appraisal	$550
inspection	$525
recording fees	$125
escrow	$2,000

evaluate the lenders 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.

Explanation:

Step1: Calculate the estimated closing costs

The loan amount is $120000$ and the estimated closing - cost percentage is $3.75\%$. So the estimated closing costs $E$ are $E = 120000\times0.0375=\$4500$.

Step2: Calculate the actual closing costs

Add up all the actual closing - cost charges: $300 + 600+1250 + 550+525+125+2000=\$5350$.

Step3: Calculate the percentage error

The absolute error $|E - A|=|4500 - 5350| = 850$. The percentage error $P$ is $P=\frac{|E - A|}{A}\times100=\frac{850}{5350}\times100\approx15.9\%$. Since $15.9\%>0.5\%$.

Answer:

d. The lender made a poor estimate; it was off by more than 0.5% of the actual closing costs.