Home Hacker how-to: Compare loan offers
How do you compare mortgage loan offers? You can start by focusing on one section of the Loan Estimate, a disclosure that the lender is required to give you within a few days of applying.
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What the Loan Estimate does
The Loan Estimate packs a lot of information into its three pages. It tells you how much the lender and other businesses will charge to give you the loan, discloses the interest rate, and tells you what your monthly house payment will be, among other things. For more information about the document, see our Loan Estimate Guide.
Let’s assume you have two or more mortgage offers to compare. (Because you applied for a loan with two or more lenders, or a lender gave you at least two loan options.) Each of those mortgage offers comes with its own Loan Estimate. So you have two or more Loan Estimates, and you have to choose which one is best for your situation. Where do you begin?
Use the Comparisons section
The best place to start is near the top of page 3 of each Loan Estimate. There you will find the “Comparisons” section. The first item in that section is called “In 5 Years.” It gives you two numbers. Those numbers are the key to comparing loan offers.
The top number tells you how much money you will pay in the first five years. It adds all the upfront fees you’ll pay, plus the first five years of your house payments (minus property taxes and homeowner’s insurance). Generally speaking, a lower number is better.
To be more specific, this top number adds up the first 60 months that you will pay of principal (the portion of the loan that you’ll pay back during that time), interest (the amount charged for borrowing the money) and any mortgage insurance (a policy that protects the lender if you end up in foreclosure).
The bottom number in the “In 5 Years” section adds up the principal that you will have paid off in that period. Generally speaking, a higher number is better.
The principal is the portion of the loan that you will have paid back in the first five years. For example, if you borrow $100,000 and you pay back $10,000 in principal in the first five years, that means that you still owe $90,000 of the original amount you borrowed.
Judging which loan is best
When you take two or more loan offers and compare these dollar figures side-by-side, you will see which loan costs the most and which loan costs the least over the first five years. You will see which loan pays off the most principal in the first five years, and which pays off the least principal.
The least-expensive loan in the first five years isn’t necessarily the one that pays the most principal during that time. This means that your decision may be a matter of personal judgment.
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