8 Things a Loan Estimate Will Tell You About Your Mortgage Loan

by Dana George | Published on Oct. 13, 2021

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Mortgage lender goes over documents with couple.

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It's amazing how one simple document can make it easier to choose the right loan for you.

As mystifying as mortgage shopping may feel, it used to be even more confusing. To help consumers better understand the details included in a mortgage lender's loan offer, Loan Estimates were developed.

A Loan Estimate is the document you can easily use to compare apples to apples, or in this case, one mortgage offer against another. To make it easier, every lender uses the same Loan Estimate form. Lenders are required to provide a Loan Estimate within three days of receiving your mortgage application.

If you ever hear a Loan Estimate referred to as a "Good Faith Estimate'' don't be surprised. Loan Estimates replaced Good Faith Estimates in 2015 to comply with the Truth in Lending Act, and the terms are sometimes used interchangeably. The Truth in Lending Act was designed to help consumers gain a better understanding of the mortgages available to them.

Hopefully, you make notes when you speak with a loan officer because at the very top of a Loan Estimate is a quick and dirty overview of your loan. If you have notes, you can compare what you were promised by the lender to what's included in the loan overview. If there are any discrepancies, the time to get them straightened out is before making a final decision as to which lender you prefer to work with.

Here are eight essential pieces of information a Loan Estimate promises to provide:

1. Loan terms

This section succinctly covers the following:

  • Loan amount
  • Interest rate
  • Monthly principal and interest
  • If there is a prepayment penalty
  • If there is a balloon payment

2. Projected payments

This section underscores how much you can expect your payment to be based upon the interest rate and loan term (how many years you have to pay the loan in full). It includes a payment calculation, excluding estimated taxes, insurance, or assessments.

To come up with an amount that's closer to what you'll actually be expected to pay each month, estimate property taxes and call your insurance company to get an idea of how much homeowners insurance premiums will likely be. Divide each amount by 12 and add that to the monthly principal and interest payment.

This section of the Loan Estimate will also indicate whether your property tax and homeowners insurance will be included in an escrow account. That is normally the case but is not universal.

3. Cost at closing

One thing you will discover as you shop for a mortgage is that fees vary by lender. While one lender may offer you a slightly lower interest rate, you'll need to make sure they don't make up the difference by charging higher loan fees than other lenders.

This section of the Loan Estimate includes two pieces of important information: How much your closing costs are expected to be and how much cash you need to bring to closing.

4. Loan cost

You'll want to pay special attention to this section of the estimate. Not only does it break down every expense you can expect to encounter if you choose to borrow from a particular lender, but it also tells you which expenses are fixed and which you can shop around for (in hopes of finding a better deal).

Rather than dig through loan documents like home buyers of yore had to do, you can easily find all expenses -- large and small -- on a single page.

5. Other costs

This section of the document helps you remember expenses you might have forgotten or have never had experience with. It includes things like recording fees and transfer taxes. It may not seem like a big deal, but every small piece of information makes you a more informed buyer.

6. Calculating cash to close

This section offers a deeper dive into closing costs, breaking down how the lender came up with their total.

7. Comparisons

This brief portion of the Loan Estimate may be the most useful as you compare one loan offer to another. It includes three things:

  1. Where you'll stand in five years, including how much you will have paid at that point in total payments and how much of your loan you will have paid off at the five-year mark.
  2. The annual percentage rate (APR). Unlike the interest rate, the APR reflects the true cost of the loan, including fees. For example, you may have an interest rate of 3.25% but the "true cost" of that loan lands at 3.55%
  3. Total interest percentage (TIP) is also included. The TIP is the total amount of interest you'll pay over the life of the loan.

8. Other considerations

This brief catch-all segment includes information you need to know, including:

  • Whether the lender requires a home appraisal
  • If the mortgage is assumable when you sell
  • Whether the lender requires homeowners insurance (spoiler alert: they do)
  • When your payment is considered late and what happens at that point
  • If you're allowed to refinance the loan
  • Whether the lender intends to service the loan themselves or transfer servicing to another party

While it's tough to get too excited about most standard forms, the Loan Estimate is unique. It breaks down a complex purchase into easy-to-understand, bite-sized pieces. Better yet, it makes you a more savvy home buyer.

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