The Loan Estimate was designed to make it easy for borrowers to compare loan offers. The document contains a shortcut to make comparisons especially simple: the 5-year cost.
On Page 3, the top item in the “Comparisons” section details:
- The total mortgage-related payments you will make in the first 5 years — closing costs plus the total principal, interest and mortgage insurance you will pay in the first 60 months.
- How much principal you will have paid off in the first 5 years. Unless the home’s value falls, this is the amount of equity you will accumulate in those 5 years.
Page 3 of Loan Estimate form
These 2 numbers — total loan costs and equity accumulated in 5 years — are useful in comparing mortgage offers. The Consumer Financial Protection Bureau intended for borrowers to focus on those numbers.
The Loan Estimate was refined through several rounds of focus-group testing. From the start, participants identified “the loan that showed more principal paid off in 5 years as 1 of their choice factors,” according to the focus-group report.
Besides the “in 5 years” numbers, 2 other figures appear in the “Comparisons” section on Page 3:
- The annual percentage rate, or APR, is a calculation that results from adding closing costs to the total interest paid over the life of the loan.
- The total interest percentage, or TIP, represents the total interest paid over the life of the loan as a percentage of the loan amount. For example, if you borrowed $100,000 and then paid $82,000 interest over the next 30 years, the TIP would be 82%.
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