September 28, 2015 in Mortgages

When you apply for a mortgage, the lender is required to give you a document called a Loan Estimate.

This slideshow gives a brief tour of the Loan Estimate and shows where you can find the answers to such questions as:

- How much will my monthly payments be?
- How much are the closing costs?
- How big a check will I have to write at the closing table?
- I’m comparing 2 or more Loan Estimates. Which is the better or best deal?

And that’s not all. Let’s begin.

Find the estimated monthly mortgage payment on Page 1, in the “Projected Payments” section.

This section shows the total estimated payment. It also divides the mortgage payment into:

- Principal and interest.
- Mortgage insurance.
- Escrow (the monthly cost of property taxes and homeowners insurance).

The loan’s interest rate can be found on Page 1, in the “Loan Terms” section.

This section not only tells you the interest rate, but whether it’s a fixed-rate or adjustable-rate mortgage.

You’ll find a summary in the “Costs at Closing” section at the bottom of Page 1.

Page 2 contains a detailed itemization of the closing costs in the “Loan Costs” and “Other Costs” sections.

Don’t confuse the closing costs with “cash to close.” That’s the money that you’ll have to part with at the closing table.

The amount of money you pay at the closing table is known as “cash to close.” The Loan Estimate lists the amount at the bottom of Page 1, in the “Costs at Closing” section.

If you want to know how that number was calculated, see the “Calculating Cash to Close” section of Page 2.

It’s helpful to lay 2 or more Loan Estimates side by side and compare them page by page. But there’s a shortcut to comparing loan offers: the 5-year cost.

Look at Page 3, the “Comparisons” section. It shows 2 numbers that cut through the clutter when you compare mortgage offers:

- Total loan-related payments for the first 5 years: closing costs plus principal, interest and mortgage insurance that you’ll pay in the first 60 months. The lower, the better.
- Principal paid off in the first 5 years. The higher, the better, because the more principal you pay off, the faster you gain equity.

The “Comparisons” section has 2 other numbers:

- Annual percentage rate, or APR. The lower, the better.
- Total interest percentage, or TIP. The lower, the better.

The Loan Estimate flags risky loan features. These may include:

- Prepayment penalty: The mortgage has one if “yes” appears next to “Prepayment Penalty” on Page 1, along with the maximum amount.
- Balloon payment: The mortgage has one if “yes” appears next to “Balloon Payment” on Page 1, along with the size of the payment.
- Adjustable payments: If it’s an adjustable-rate mortgage, an interest-only or step-payment loan, or a pay-option ARM, you’ll find “yes” next to “Monthly Principal & Interest” on Page 1.

The Loan Estimate tells you in multiple places whether the loan is an adjustable-rate mortgage, or ARM.

On Page 1, the “Loan Terms” section provides basic information about the ARM’s features:

- The initial interest rate.
- How often the interest rate will be adjusted.
- How high the interest rate can go and when it can reach the maximum.

On Page 2, you will find 2 tables that provide detailed information about the ARM:

- The “Adjustable-Interest Rate (AIR) Table” describes the index and margin, initial interest rate, the lifetime caps on interest rates, the timing of rate adjustments, and periodic caps.
- The “Adjustable-Payment (AP) Table” describes whether the loan allows interest-only payments and other exotic payment features. It describes the minimum and maximum principal-and-interest payment after the 1st adjustment, and the maximum possible principal-and-interest payment if the interest rate maxes out.

A rate lock guarantees that the lender will offer you a specific combination of interest rate, points and lender credit for the mortgage. A lock lasts for a limited time, and then it expires.

The Loan Estimate tells you whether the rate has been locked, and for how long. This information is found near the top of Page 1:

- If the “no” box is checked, then you have not locked an interest rate. In mortgage lingo, you are “floating” the rate. While you are floating, interest rates could move up or down, responding to market forces. These fluctuations could cause your potential mortgage rate and monthly payments to move up and down, too.
- If the “yes” box is checked, then your interest rate is locked. The rate lock’s expiration date will be printed here.

To understand more, read “Answers to 5 key mortgage rate-lock questions.”

Is your credit mortgage-ready? Get your free credit score at myBankrate.