Why Should You Pay Attention to Your Loan Estimate?
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Your Loan Estimate is the first real look at all of the costs associated with obtaining a mortgage loan. If you're shopping around, the Loan Estimate is a great tool to use when you're selecting the right lender for you. Each lender will have their own fee structures and some loan programs are more expensive than others. Always ask your mortgage professional to review the loan estimate with you in its entirety.
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Page 1: Program Outline
1. Save This Loan Estimate to Compare to Your Closing Disclosure:
The Loan Estimate is your first look at the total cost of obtaining your mortgage. Hold onto it and compare your Loan Estimate to the Closing Disclosure you will receive later in the process when fees are finalized to make sure the lender has been consistent with their quote.
2. Date Issued:
Per regulations, your lender will provide you with a Loan Estimate within three business days of completing a full loan application. When shopping around, make sure your estimates are from the same dates. This will give you a complete apples to apples comparison because rates change daily.
3. Loan Term:
The Loan Term is how long it will take to pay off your debt. The longer the loan, the higher the interest rate. Be cautious of lenders who will show you a lower interest rate with a shorter loan term. The interest rate may be lower, but your monthly payment will be higher.
4. Product:
The loan product will typically be Fixed-Rate or Adjustable-Rate-Mortgage (ARMs). Adjustable-Rate-Mortgages usually offer lower fixed rates before they are adjusted. When comparing rates, make sure they are the same loan product.
5. Loan Type:
Your Loan Type will usually fall into one of the four major loan types: Conventional, FHA, VA, or USDA. Your mortgage professional should discuss which loan type you will be offered before you receive your loan estimate. It is important to understand which loan guidelines you will have to abide by. For instance, FHA can offer a lower rate but the mortgage insurance for FHA loans is more costly than Conventional, causing your monthly payment to be more expensive than a Conventional loan type with a slightly higher rate.
6. Loan Terms:
This section gives you a breakdown of the most important aspect of your mortgage, your interest rate. This section also gives you an outline of your loan features including: Loan Amount, Monthly Principle & Interest Payments, whether or not you have a prepayment penalty (paying off your loan ahead of schedule), and if there is a Balloon Payment due at any point.
7. Projected Payment:
In this section, you will get a breakdown of your monthly payment including estimated costs of taxes and homeowner's insurance. This breakdown will also show you how many years you will have to pay mortgage insurance. For this example, the borrower will pay mortgage insurance for the first 7 years of their loan term before the insurance is dropped off and the monthly payment is lowered in years 8-30.
8. Costs at Closing:
At the bottom of the first page of your Loan Estimate you get a breakdown of the estimated Closing Costs and Cash-To-Close. Your Closing Costs will be broken down further on the next page. They include all of the charges for obtaining your mortgage, from origination costs to your prepaids for escrow accounts. Your Cash-To-Close estimate is the combination of your Closing Costs plus your down payment. Additionally, if you are receiving a Lender Credit, it will appear here.
The Loan Estimate is your first look at the total cost of obtaining your mortgage. Hold onto it and compare your Loan Estimate to the Closing Disclosure you will receive later in the process when fees are finalized to make sure the lender has been consistent with their quote.
2. Date Issued:
Per regulations, your lender will provide you with a Loan Estimate within three business days of completing a full loan application. When shopping around, make sure your estimates are from the same dates. This will give you a complete apples to apples comparison because rates change daily.
3. Loan Term:
The Loan Term is how long it will take to pay off your debt. The longer the loan, the higher the interest rate. Be cautious of lenders who will show you a lower interest rate with a shorter loan term. The interest rate may be lower, but your monthly payment will be higher.
4. Product:
The loan product will typically be Fixed-Rate or Adjustable-Rate-Mortgage (ARMs). Adjustable-Rate-Mortgages usually offer lower fixed rates before they are adjusted. When comparing rates, make sure they are the same loan product.
5. Loan Type:
Your Loan Type will usually fall into one of the four major loan types: Conventional, FHA, VA, or USDA. Your mortgage professional should discuss which loan type you will be offered before you receive your loan estimate. It is important to understand which loan guidelines you will have to abide by. For instance, FHA can offer a lower rate but the mortgage insurance for FHA loans is more costly than Conventional, causing your monthly payment to be more expensive than a Conventional loan type with a slightly higher rate.
6. Loan Terms:
This section gives you a breakdown of the most important aspect of your mortgage, your interest rate. This section also gives you an outline of your loan features including: Loan Amount, Monthly Principle & Interest Payments, whether or not you have a prepayment penalty (paying off your loan ahead of schedule), and if there is a Balloon Payment due at any point.
7. Projected Payment:
In this section, you will get a breakdown of your monthly payment including estimated costs of taxes and homeowner's insurance. This breakdown will also show you how many years you will have to pay mortgage insurance. For this example, the borrower will pay mortgage insurance for the first 7 years of their loan term before the insurance is dropped off and the monthly payment is lowered in years 8-30.
8. Costs at Closing:
At the bottom of the first page of your Loan Estimate you get a breakdown of the estimated Closing Costs and Cash-To-Close. Your Closing Costs will be broken down further on the next page. They include all of the charges for obtaining your mortgage, from origination costs to your prepaids for escrow accounts. Your Cash-To-Close estimate is the combination of your Closing Costs plus your down payment. Additionally, if you are receiving a Lender Credit, it will appear here.
Page 2: Closing Costs
1. Section A - Loan Costs:
Sections A of your loan costs include your Origination Costs. Lenders are required to quote accurate charges that CANNOT increase during the loan process. If they do increase, the lender will typically have to pay the difference of the quoted cost and the actual cost. If you are “paying points” to receive an interest rate lower than the one you qualify for, that will also be listed here. When comparing lenders, this is a good section to look at because one lender may charge higher base fees than others.
2. Section B - Services You Cannot Shop For:
Section B of Loan Costs shows costs for loan services that you do not have the ability to pick for yourself. These are 3rd party services, such as the appraisal, that are chosen by the lender so you cannot shop around for less expensive options. When comparing Loan Estimates from different lenders, check this section to see who offers lower loan costs that you will have to pay for.
3. Section C - Services You Can Shop For:
In this section, you will see loan service fees that you do have some control over. Title fees and home inspection fees will be displayed here. You have the ability to choose which home inspection company you use, as long as they are certified for their work. You may also choose which title company is used for the loan, however, the title company used is agreed upon between the buyer and the seller in the purchase agreement that you sign when your offer is accepted.
4. Sections E through I - Other Costs:
Other Costs are charges related to the transfer of the home into your name and other costs of owning the home. Section E shows your costs for Taxes and other government fees. In Section F, you will find your prepaid costs. The cost of your Homeowner's Insurance premium is located in this section, as well as the prepaid interest you have to pay for your loan (based on the day of the month your loan closes). Your Escrows are located in Section G. In most cases you will need to pay a few months of "cushion" to set up your escrow account, this ensures that enough funds are in the account when your escrow payments become due. Section H will show optional charges that may not be required but are associated with the loan. Finally, Section I is a summary of the total costs from Section E through I.
5. Calculating Cash to Close:
At the end of page 2 you will find a breakdown of how much cash you will need to bring to the closing table. This breakdown takes all of your charges from page 2 (J), adds in your down payment, and subtracts your Earnest Money Deposit plus any other adjustments such as Lender Credits and Seller Credits. Keep in mind that this is only an estimate, fees can change over the course of the loan that will cause this number to fluctuate. It is important to know how your estimate matches up to your actual closing costs at the end of the loan process.
Sections A of your loan costs include your Origination Costs. Lenders are required to quote accurate charges that CANNOT increase during the loan process. If they do increase, the lender will typically have to pay the difference of the quoted cost and the actual cost. If you are “paying points” to receive an interest rate lower than the one you qualify for, that will also be listed here. When comparing lenders, this is a good section to look at because one lender may charge higher base fees than others.
2. Section B - Services You Cannot Shop For:
Section B of Loan Costs shows costs for loan services that you do not have the ability to pick for yourself. These are 3rd party services, such as the appraisal, that are chosen by the lender so you cannot shop around for less expensive options. When comparing Loan Estimates from different lenders, check this section to see who offers lower loan costs that you will have to pay for.
3. Section C - Services You Can Shop For:
In this section, you will see loan service fees that you do have some control over. Title fees and home inspection fees will be displayed here. You have the ability to choose which home inspection company you use, as long as they are certified for their work. You may also choose which title company is used for the loan, however, the title company used is agreed upon between the buyer and the seller in the purchase agreement that you sign when your offer is accepted.
4. Sections E through I - Other Costs:
Other Costs are charges related to the transfer of the home into your name and other costs of owning the home. Section E shows your costs for Taxes and other government fees. In Section F, you will find your prepaid costs. The cost of your Homeowner's Insurance premium is located in this section, as well as the prepaid interest you have to pay for your loan (based on the day of the month your loan closes). Your Escrows are located in Section G. In most cases you will need to pay a few months of "cushion" to set up your escrow account, this ensures that enough funds are in the account when your escrow payments become due. Section H will show optional charges that may not be required but are associated with the loan. Finally, Section I is a summary of the total costs from Section E through I.
5. Calculating Cash to Close:
At the end of page 2 you will find a breakdown of how much cash you will need to bring to the closing table. This breakdown takes all of your charges from page 2 (J), adds in your down payment, and subtracts your Earnest Money Deposit plus any other adjustments such as Lender Credits and Seller Credits. Keep in mind that this is only an estimate, fees can change over the course of the loan that will cause this number to fluctuate. It is important to know how your estimate matches up to your actual closing costs at the end of the loan process.
Page 3: Additional Loan Information
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1. Lender Information:
Check to make sure that the lender corresponds with the lender you were talking to. It's important to make sure that the loan officer you have been talking to is also listed here. If there are inaccuracies, call your loan officer! 2. Comparisons: This section offers several useful calculations when you are comparing loan estimates from different lenders. Loan costs vary from lender to lender just as loan costs vary from one loan program to another. It is important to make sure you have the same loan program when comparing estimates. The Annual Percentage Rate (APR) is different from your interest rate. Your APR includes the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate. The Total Interest Percentage (TIP) is the total interest you will pay over the course of the loan expressed as a percentage of your loan amount. 3. Late Payment: Making your mortgage payment on time every month is extremely important. You should never plan on making any late payments. However, if there is a situation where you are forced to make a late payment on your mortgage, it is important to know what the cost will be. |