How to read and compare mortgage loan estimates
Unless you’re planning to pay cash for a home, you’ll need to secure a mortgage to finance the purchase. An important part of that process is evaluating the loan estimate, which explains the mortgage offer and terms, including the interest rate.
However, a loan estimate is just that: an estimate. Here’s what you need to know about the loan estimate, and how to compare more than one to ensure you’re getting the best deal.
What is a loan estimate?
A loan estimate is a standard, three-page document from a lender containing details about a mortgage, such as the closing costs, interest rate and monthly payment. The information in the document is an estimate — in other words, not final — but it can assist you with making a decision about which loan offer to commit to.
The loan estimate “informs the buyers of what funds are needed to close the loan. This will include prepaid interest, closing costs, third-party fees and escrow items. It will also provide them with the detailed estimated payment,” explains Stephanie McAllister, a senior mortgage advisor at Prosperity Home Mortgage in Atlanta.
“This helps a buyer to understand, at the beginning of the process, the estimated cost of the transaction,” McAllister says.
All lenders use the same loan estimate document, so it’s easy to compare costs.
“Similar to nutrition labels, loan estimates are legally required to look identical across all lenders,” says Emanuel Santa-Donato, vice president of Capital Markets and Lead Acquisitions at Better.com, a digital lender. “That way, it’s easy for you to compare loan offers and harder for lenders to hide fees.”
The loan estimate was implemented as a result of the Dodd-Frank Act, which mandated new requirements for lenders, among many other provisions, after the 2008 recession.
When will I get the loan estimate?
When you apply for a mortgage, your lender will provide you with a loan estimate within three days of your application. To apply, you’ll generally need to provide the lender with your legal name, proof of income, Social Security number, desired loan amount, desired property address and list price.
How to read and compare loan estimates
Whether you’re purchasing a home or refinancing, the loan estimate is an important document, so understanding the information that’s presented is key.
Loan estimate page 1
The first page of the loan estimate outlines the general terms of the mortgage in three areas:
- Loan terms
- Projected payments
- Costs at closing
Each of these spells out the details of the loan. In section No. 1 indicated in the sample above, you’ll find the following information:
- Loan term – The length of the mortgage (such as 30 years)
- Purpose – What the financing is for, such as a “purchase”
- Product – What kind of mortgage it is, such as a “fixed rate”
- Loan type – Whether the mortgage is a conventional, FHA or VA loan, or another kind of loan
- Rate lock – Whether the lender has locked the interest rate on the mortgage, and the date the lock expires
In section No. 2 above, you’ll learn more about the:
- Loan amount – The amount you’re borrowing and whether it can increase
- Interest rate – The interest rate (a percentage) and whether it can increase
- Monthly principal and interest – The monthly mortgage payment excluding homeowners insurance and property taxes
- Prepayment penalty – Whether you have to pay a prepayment penalty if you add extra payments or fully repay before the end of the loan term
- Balloon payment – Whether there’s a balloon payment, which is a large lump sum due at the end of the loan term
In sections No. 3 and No. 4 above, you’ll find an overview of your payments and costs.
- Payment calculation – A breakdown of the monthly mortgage payment including the principal and interest, escrow amounts and private mortgage insurance (PMI) premiums, if applicable
- Estimated total monthly payment – The estimated monthly mortgage payment including the principal and interest, escrow and PMI, if applicable
- Estimated taxes, insurance and assessments – The estimated homeowners insurance and property taxes, and whether they’ll be in escrow
- Estimated closing costs – The closing costs of the mortgage
- Estimated cash to close – The closing costs plus anything else you’ve paid upfront (such as the down payment, earnest deposit or any credits from the seller)
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 page 2
Like page one of the loan estimate, page two includes three components:
- Loan costs
- Other costs
- Calculating cash to close
These explain all of the costs of the mortgage, including fees from providers and services you’re required to use, such as the appraiser, and other providers and services you can shop around and may find a lower price for, such as the title insurance company.
As shown in section No. 5 above, the column on the left breaks down the following costs and services:
- A: Origination charges – The fee for initiating the mortgage, which can include an application fee and other lender charges, as well as any points you may be purchasing to lower your interest rate
- B: Services you cannot shop for – A list of necessary services to close the mortgage and their costs, such as the appraisal and a credit check, that you can’t choose your own provider for
- C: Services you can shop for – A list of necessary services to close the mortgage and their costs, such as the title search and survey, that you’re allowed to choose your own provider for
- D: Total loan costs – The sum of parts A, B and C
The most important numbers to compare are in parts A and B: origination charges and fees for the services you can’t shop for.
“These numbers vary by lender and impact your monthly payment and cash due at closing,” Santa-Donato says. “The other charges and prepaid amounts, while important in your overall cash-to-close, have little to no variation between lenders.”
You do have the option to shop for a provider in part C if you think you can get a better deal. Note that even if you compare costs with other providers, your lender may have a relationship with the one they’ve listed on the loan estimate, which may or may not come with a special partner rate.
The other details, as shown in section No. 6 above, are:
- E: Taxes and other government fees – The fees for recording the mortgage with the city or county and the property transfer taxes, if applicable
- F: Prepaids – Any costs you’re prepaying, such as homeowners insurance or mortgage insurance premiums or property taxes
- G: Initial escrow payment at closing – Your first homeowners insurance premiums and property taxes to be in escrow
- H: Other – Additional costs such as an owner’s title insurance policy (which is often required, but optional sometimes)
- I: Total other costs – The sum of parts E, F, G and H
- J: Total closing costs – The sum of parts D and I
In the final component on page two, “Calculating cash to close” (section No. 7 above), you’ll find a breakdown of the complete costs needed at the closing, including the down payment and total closing costs (as calculated in part J). This is the full estimated amount of cash you’ll need to have on hand to close the mortgage.
Loan estimate page 3
The final page of the loan estimate includes details like the names of the lender and the loan officer, and three important figures that can help you make comparisons (see section No. 8 in the sample above):
- How much of the loan principal you’ll pay off in the first five years of the loan, as well as the combined principal, interest and mortgage insurance (if applicable)
- Your annual percentage rate, or APR, the combined costs of the loan over the term, expressed as a rate (not your interest rate)
- Your total interest percentage, which is the amount of interest you’ll pay over the term, expressed as a percentage of the loan
The final page also explains other parts of the process (see section No. 9 above), such as appraisal and homeowners insurance requirements, assumption (essentially, whether the loan can be assumed by the next owner of the property), any late payment penalties and how the loan will be serviced.
What to watch for on a loan estimate
According to the Consumer Financial Protection Bureau (CFPB), borrowers should first confirm that all of the information on the estimates is correct, including the spelling of your name and the loan amount and term.
Then, you’ll want to note the differences between estimates, such as 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 to see which mortgage offer best fits your needs and situation.
Other things to keep an eye out for, according to Santa-Donato, include:
- Third-party fees that appear in one lender’s loan estimate and not another’s
- Promises of credits after closing that don’t appear on the loan estimate
- Increasing costs if there’s a change in circumstance, such a change in employment or income
If you’re refinancing, Santa-Donato also cautions to be wary of differences in the loan amount.
“A lender may increase your loan amount slightly to create a no-closing-cost loan,” explains Santa-Donato. “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. For an apples-to-apples comparison across lenders, you should get loan estimates with identical loan amounts.”
Read your loan estimate in detail, ask as many questions as you need to understand it fully and raise any concerns with the lender. It’s smart, also, to engage a professional to walk through your loan estimates with you to explain any unclear information.
“If buyers are comparing lenders, I offer to do a full comparison for them so they can quickly compare any differences,” McAllister says.
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