How to read and compare mortgage loan estimates
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Most people shopping for a home also need to obtain a mortgage to finance the purchase. The mortgage loan estimate is a document that spells out many of the key terms and costs of the mortgage offer.
There’s more to a mortgage offer than the lump sum they’ll let you borrow. It’s also important to realize that a loan estimate is just that: an estimate. So, if you are mortgage-shopping, you should familiarize yourself with the key components of the estimate. Read on to discover the key details and how to compare loan estimates to get the best mortgage for your needs.
What is a loan estimate?
A loan estimate is a standardized, three-page document from a lender containing details about a mortgage intended to help homebuyers comparison-shop between offers.
While the information in the document is a good-faith estimate — in other words, not final — a mortgage loan estimate is designed to give the homebuyer a comprehensive overview of the costs they will incur so they can prepare and budget appropriately.
“This helps a buyer to understand, at the beginning of the process, the estimated cost of the transaction,” says Stephanie McAllister, a senior mortgage consultant at Prosperity Home Mortgage in Atlanta.
What does a loan estimate include?
The good news is, loan offers are somewhat easy to compare, because all lenders are required to use the same loan estimate document, a standard that was implemented as a result of the Dodd-Frank Act of 2010. Among other consumer protections Congress codified in the aftermath of the real estate crisis and the Great Recession, Dodd-Frank mandated new requirements for how lenders communicate to borrowers about mortgage costs and fees. “Similar to nutrition labels, loan estimates are legally required to look identical across all lenders,” says Emanuel Santa-Donato, senior vice president at Tomo, a Stamford, Connecticut-based mortgage-lending fintech startup. “That way, it’s easy for you to compare loan offers and harder for lenders to hide fees.”
For homebuyers, this means you can count on your loan estimate including the following key numbers:
- interest rate
- detailed closing costs
- prepaid interest
- third-party fees
- escrow expenses
- detailed monthly payment estimate
When will I get the mortgage loan estimate?
Within three days of applying for a mortgage, your lender must provide you with a loan estimate. If this is your first time trying to qualify for a mortgage, you’ll need to gather the following information and documentation in preparation for the application process: your legal name, proof of income, Social Security number, desired loan amount, address of the property you want to finance and its list price.
How to read and compare mortgage loan estimates
You’ll receive a loan estimate whether you’re purchasing a home or refinancing. In either case, you should use the document as a guide for budgeting and for comparing different lenders’ offerings.
Here’s a page-by-page breakdown of what a loan estimate contains (visuals courtesy of the Consumer Finance Protection Bureau, which an example of a loan estimate on the standardized form).
Loan estimate example: page 1
The first page of the loan estimate outlines three main, general terms of the mortgage, including:
- Terms of your loan
- Your projected payments
- Closing costs
Taken together, these details will give you a good idea of how much the loan will cost you. For instance, in section No. 1, notice the following information:
- Loan term – The number of years it will take you to pay off the mortgage
- Purpose – If the loan is to purchase or to refinance a home
- Product – Whether the mortgage is fixed- or adjustable-rate
- Loan type – Whether the mortgage is a conventional loan, or if it is some other type, such as an FHA or VA loan
- Rate lock – If the lender has locked the interest rate and when that lock expires
In section No. 2 above, you’ll learn more about the:
- Loan amount – How much you’re borrowing and whether it can be increased or not
- Interest rate – The percentage interest rate you’ll pay, and if it is fixed for the life of the loan or will adjust (and under what terms)
- Monthly principal and interest – The total you can expect to pay for your mortgage payment monthly, not including your homeowners insurance and property taxes
- Prepayment penalty – Stipulates if you’ll be charged a fee, called a prepayment penalty, if you choose to pay down the mortgage more quickly or pay it off entirely before the original loan term ends
- Balloon payment – A large lump sum you’ll pay when the loan term ends. Your loan estimate will tell you if there is a balloon payment and how much it is
In sections No. 3 and No. 4 above, you’ll find an overview of your payments and costs.
- Payment calculation – This is a breakdown of what you’ll pay monthly, a total that includes principal and interest, any escrow payments or private mortgage insurance (PMI) premiums, if applicable
- Estimated total monthly payment – This totals up the different components detailed above that go into your estimated regular mortgage repayments
- Estimated taxes, insurance and assessments – You’ll get an estimate of how much your homeowners insurance and property taxes will cost, as well as what funds will be held in escrow
- Estimated closing costs – A total of the various components of your mortgage closing costs
- Estimated cash to close – Includes closing costs plus any additional money you’ll have to pay upfront, including the down payment on the property, earnest deposit, and any seller concessions or credits
Page one also includes the applicant’s name, the date of the loan estimate, the address of the home and the price of the property.
On page one, “you should make sure the interest rate and loan amount listed match what you selected or discussed with the lender,” Santa-Donato says.
Loan estimate example: page 2
The second page of your loan estimate, “Closing Cost Details,” also contains three components:
- Loan costs
- Other costs
- Calculating cash to close
This page is where you get a line-by-line breakdown of all your mortgage costs, including provider fees for required services such as the appraiser, along with costs for third-party-provided services such as title insurance. The form will delineate which of these you have the option of shopping around for, in search of a lower price.
Under “Loan costs,” you get a breakdown of the following services along with their costs in the left-hand column:
- A: Origination charges – Your lender charges a fee for initiating the mortgage, which can include charges for the application and other services, plus any points you’re buying upfront to lower your interest rate
- B: Services you cannot shop for – This details the services you’re required to pay for in order to close the mortgage, such as an appraisal and a credit check, along with what those services cost
- C: Services you can shop for – This is a list of additional required services, such as a property survey and title search, and how much they cost. The difference between this and the list above is that you have the option of shopping around and comparing providers
- D: Total loan costs – This is the total sum of parts A, B and C
When you’re comparing mortgage offers between lenders, you should focus on the numbers in parts A and B: the origination charges and fees for the services for which you can’t shop around.
It’s important to use these numbers to compare loan estimates because they vary by lender and have a significant impact on both the amount of your monthly payment and how much cash due at closing you’ll need, Santa-Donato says. “The other charges and prepaid amounts, while important in your overall cash-to-close, have little to no variation between lenders,” he advises.
Where you do have the opportunity to shop around for a better deal is on the service fees delineated in part C. Keep in mind while you’re comparison-shopping that your lender might have partnerships with some of these service providers that include a preferential rate.
A slew of other miscellaneous costs and charges are detailed in section No. 6 above. These include:
- E: Taxes and other government fees – This part of the estimate includes fees for recording the mortgage with the city or county as well as, if applicable, property transfer taxes
- F: Prepaids – A category that comprises costs like homeowners insurance premiums, mortgage insurance premiums and property taxes
- G: Initial escrow payment at closing – You have to pay upfront for the items that will go in escrow, including your first homeowners insurance premiums and property taxes
- H: Other – Any extra additional and sometimes-optional costs such as an owner’s title insurance policy
- I: Total other costs – The sum of parts E, F, G and H
- J: Total closing costs – The sum of parts D and I
The final section on the second page of the loan estimate, “Calculating cash to close,” provides a breakdown of each and every cost you’ll have to pay at the closing, including the down payment and total closing costs calculated in part J of the estimate document. This is the full estimated amount of cash you’re required to have on hand when you close on your mortgage.
Loan estimate example: page 3
The final page of the loan estimate aggregates the most important details of your mortgage agreement, like the names of the lender and the loan officer, plus three key figures you can use for comparison-shopping in section No. 8 as shown above):
- Amount of the loan principal you will have paid off after the first five years of your mortgage term, as well as the combined principal, interest and (when applicable) mortgage insurance costs
- Annual percentage rate, or APR. This is the combined cost you will pay over the entire loan term, expressed as a rate (not your interest rate)
- Total interest percentage, or TIP, which is the amount of interest you’ll pay over the term of the loan, calculated as a percentage
The final page also explains other parts of the mortgage payment process and your responsibilities as the borrower. This spells out, for instance, your appraisal and homeowners insurance requirements, whether or not the loan can be assumed by the next owner of the property (a type of transfer called assumption, plus any late payment penalties and whether the loan will be serviced by the lender or sold to a separate entity that will service it.
Important considerations when comparing loan estimates
The Consumer Financial Protection Bureau (CFPB) recommends that borrowers confirm the accuracy and completeness of all of the information on the estimates, such as the spelling of your name and the loan amount and term.
If you’re comparing offers between two or more lenders, pay attention to where the estimates differ on the interest rate, origination charges and points. You’ll also want to compare the bottom line of the estimated monthly payment and the estimated cash-to-close amount to determine which mortgage offer best fits your needs and personal finances.
Other things to keep an eye out for, according to Santa-Donato, include:
- Any third-party fees that appear in one lender’s loan estimate and not another’s
- If any credits you were promised verbally after closing don’t appear on the loan estimate
- If you could incur an increase in costs if your employment, income or other circumstances change
If you’re refinancing, Santa-Donato warns borrowers to take note of any differences in the loan amount between lenders. Be particularly wary of mortgages advertised as no-closing-cost loans, because lenders can increase the loan amount to cover those costs, which increases your total debt load.
“Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs,” Santa-Donato says. To really compare mortgage offers on an apples to apples basis, “You should get loan estimates with identical loan amounts,” he advises.
It’s crucial to read your loan estimate in detail, ask as many questions as you need to understand it fully and raise any concerns with the lender. Mortgage experts also advise borrowers, especially first-time homebuyers, to engage a professional who can walk you through your loan estimates and explain anything you don’t understand.
“If buyers are comparing lenders, I offer to do a full comparison for them so they can quickly compare any differences,” McAllister says.