The key to getting a great loan is understanding all the elements of your loan and its expenses. When you apply for a loan to refinance or purchase a home, you’ll receive a document called a Loan Estimate that breaks down all the details of the loan’s closing costs.
Although every Loan Estimate you receive is three-pages long and has the same format, not all Loan Estimates are created equal. If you don’t know what to look for, you might agree to a loan that isn’t the best for your financial situation.
We’ve broken down exactly what you need to know to read your home Loan Estimate.
What’s in a Loan Estimate?
You’ll receive your Loan Estimate within three business days of submitting your loan application. The document is meant to be a summary of all the costs expected when closing your mortgage. If the costs have changed significantly at closing, the lender is required to provide you a new Loan Estimate.
The basic elements of every Loan Estimate are:
Loan Terms: Breakdown of all the key terms of the loan
– Loan Amount
– Loan Interest Rate
– Monthly Principal and Interest
– Prepayment Penalties (if any)
– Balloon Payments (if any)
– Estimated total monthly payment for the life of the loan
– Estimated Taxes, Insurance & Assessments
Costs at Closing
– Estimated total closing costs
– Estimated cash needed to close
Closing Cost Details
– Origination Costs
– Services You Can and Cannot Shop For
– Taxes and other Government Fees
– Initial Escrow Payment at Closing
– Total Closing Costs
– Shows APR and TIP to use for comparing to other loans
– An outlook of how much you will have paid in total and in principal in 5 years
– Explains other fees you may need to pay
We’ll break down for you the most important items on each page of your Loan Estimate and certain costs to look out for when comparing estimates between lenders.
Important Items on Page 1 of Your Home Loan Estimate
Page one gives basic information about the loan terms you’ve applied for, like loan amount, the interest rate, and the expected monthly principal and interest amount.
The date of the Loan Estimate is an important one because rates and terms change daily. If you are comparing loans with different issue dates, you might be under or overvaluing one loan’s terms over another.
Loan Term, Product, and Type
In the top right corner of the Loan Estimate, you’ll see listed the term, product, and loan type. Make sure when comparing loans, these items match. Otherwise, the comparison will be less effective.
Prepayment Penalty and Balloon Payment
These are lines under the “Loan Terms” section. If either of these is marked “YES,” make sure you understand the exact terms of the prepayment penalty or balloon payment before you sign.
Estimated Total Monthly Payment
This is a row under “Projected Payments” that shows the total amount you’ll be expected to pay per month, excluding taxes, insurance, and assessments, which is shown in the line below. Add up the two rows, estimated total monthly payment, and estimated taxes, insurance, and assessments, and ask yourself: can you comfortably afford this amount every month?
Estimated Closing Costs
This is arguably the most important section of the entire Loan Estimate. It provides a critical summary of the loan fees, including prepaid and lender credits. You can find a breakout of each item in the estimated closing costs on page 2.
Estimated Cash to Close
This is the bottom row of the “Costs at Closing” section. It tells you the total amount of cash you’ll need to pay at closing. Keep a careful record of any credits you may have from an early paid down payment or closing costs. These should show up in the line item labeled “Deposit.”
Important Items on Page 2 of Your Home Loan Estimate
Under the origination charges section, you’ll see items usually labeled as “admin fee” and “underwriting fee,” all names for the lender’s fee. Lender fees are negotiable; your Loan Officer should help you compare these costs as they shop lenders for you.
Your Loan Estimate may also include an item called “points” referred to as a percentage of the loan amount. This is an amount you are paying upfront to the lender to reduce your interest rate. Ask your Loan Officer about your options for discount points and alternatives to savings.
Cost of Services You Cannot Shop For
Each lender will list out the services that they control the provider and prices for. Because the prices are non-negotiable, compare the costs of the items listed in this section with other Loan Estimates you receive. Your Loan officer should serve as a resource for what is a reasonable amount to pay for each service.
Homeowners Insurance and Property Taxes
On the right side of the page, you’ll see homeowner’s insurance and property tax items with estimated costs. Double-check if these costs are accurate. The lender gets these numbers from the homeowner insurance company and state and local governments, respectively, and mistakes do occur. Your Loan Officer should help you check the costs for accuracy.
Important Items on Page 3 of Your Home Loan Estimate
The Annual Percentage Rate (APR) shows the interest rate plus costs expressed as a percentage that you’ll pay for the loan term. When comparing loans, this is the number you should use rather than the interest rate.
All the items in the other considerations section are important to read through. Pay particular attention to the late payment section and refinance section.
The late payment section will tell you the late fee, typically expressed as a percentage of monthly principal and interest payment. Take the estimated total monthly payment number from page one to calculate what the fee will look like in dollars and cents.
The refinance section tells you whether you can refinance the loan in the future or not. Pay attention to any specific restrictions that may prevent you from refinancing in the future, as this could be a huge savings cost if rates drop in the future.
One Last Note
When shopping for a loan, be sure to keep all the Loan Estimates you receive. The final version of the Loan Estimate is what you’ll receive when you close (called the Closing Disclosure), and you’ll want the initial Loan Estimate for comparison.
You should be notified of any differences between the two documents much earlier than the closing date, so any discrepancies would be a mistake or something worse.