What is a Loan Estimate?
The Loan Estimate is the most important document you’ll see when you apply for a mortgage. It explains the key terms of your home loan, from interest rates to closing costs. Banks and mortgage companies have three business days to provide you with that estimate unless it has already decided to decline your loan.
Since October 2015, every lender must also use the same three-page Loan Estimate form. The new document was designed by the Consumer Financial Protection Bureau to replace the lender-created Good Faith Estimate form borrowers had been receiving. The bureau thought a simpler standardized form would make it easier for applicants to understand exactly what they were being offered and avoid any nasty surprises at closing time.
You’ll get a similar, easy-to-read Closing Disclosure when you reach the settlement table. Comparing the numbers on your Loan Estimate with the numbers on your Closing Disclosure will tell whether you got the deal the lender promised when you applied for your mortgage.
To make sure you know what you’re getting into, find the answers to these critical questions on your Loan Estimate:
Your Loan Estimate Will Answer:
Question 1. How much am I borrowing?
On the first page of the form, look under the Loan Terms tab for the line that says “Loan Amount.” (See red arrow below.)
If the number is more than you asked to borrow, the lender has probably rolled in some of your closing costs.
They show up on the bottom of Page 2 under the Calculating Cash to Close tab on the line that says: “Closing Costs Financed (Paid from your Loan Amount).”
That’s OK if you don’t have enough cash to pay for all of your fees. But you need to know exactly what fees and charges the lender is adding to your loan balance.
Question 2. What’s my interest rate?
You’ll find this on the Loan Terms tab line that says “Interest Rate.”
Is it the rate your lender said you were getting? If not, speak up now and demand the rate you were offered.
The Projected Payments tab breaks down the three major parts of a loan payment and shows how they will change over time.
- Principal & Interest: This is what you’re paying to reduce the amount you borrowed and cover the interest charges. You may see this cost increase in later years if you have an adjustable-rate loan. (More on this later.)
- Mortgage Insurance: This coverage limits the lender’s losses if you don’t make your payments. Banks and mortgage companies usually require this protection when buyers put less than 20% down on a home. During the first seven years of the loan, you’ll see a monthly premium. After that, the charge is usually zeroed out because you’ll have enough equity in your home to drop the coverage. (Click here for more information on mortgage insurance.)
- Estimated Escrow: Some lenders collect the money needed for such things as property taxes, homeowners insurance and association fees in advance and then pay those bills on your behalf. To see which bills your lender escrows for, look at the Other Costs tab on Page 2 of the form. Even though the “Estimated Escrow” line on Page 1 might not show increases over time, you should fully expect this part of your monthly payment to rise as those premiums, taxes and fees go up.
An astonishing number of home buyers who took out adjustable-rate mortgages in the early 2000s thought they were getting a fixed-rate loan. They were shocked when their payments began to rise — often beyond what they could afford.
Getting a fixed-rate loan?
You should see “No” three times in the Loan Term tab, under the question “Can this amount increase after closing?” Plus, the Projected Payments tab should show the same amount for Principal & Interest in years 1-7 and years 8-30.
Getting an adjustable-rate loan?
You should see “Yes” three times in the Loan Term tab, under the question “Can this amount increase after closing?” Plus, the Projected Payments tab should show different amounts for Principal & Interest in years 1-7 and years 8-30.
Question 5. What’s the cost of taking out this mortgage?
Lenders call the fees they charge you for getting the loan “origination fees.” They’re listed as charges like mortgage application fees, application fees and underwriting fees on Page 2 under the Loan Costs tab. (See blue arrows below.)
These fees typically run between 0.5% and 2% of the loan ($1,000 to $4,000 on a $200,000 loan). The best deals charge a fixed fee of $1,000 or less.
You can try to negotiate those fees or shop around to find a lender that charges lower fees.
Question 6. Am I being charged points?
Discount points are interest you prepay at closing in exchange for a lower interest rate. That’s why paying points is sometimes called “buying down the rate.” One discount point (1% of the loan amount) typically decreases the interest rate by 0.1625 to 0.25 of a percentage point on a 30-year mortgage.
If you chose to buy down your interest rate, the fee shows up on Page 2 on the Loan Costs tab under “Origination Charges” where there is a percentage followed by “(Points).” (See red arrow above.)
If you didn’t agree to pay points, but points show up on the form, talk to your lender.
Here’s how to tell if paying points makes sense for you.
Question 7. How much am I paying for an appraisal?
You’ll find the answer on Page 2 in the Loan Costs tab under “Services You Cannot Shop For.” Usually, you have to pay for the appraisal before it’s performed — and before you know whether the lender has approved your loan.
Question 8. How much money do I need to bring to the loan closing?
The cash you’ll need shows up on Page 1 on the Costs at Closing tab. You’ll see how the lender came up with that number by looking at Page 2 on the Calculating Cash to Close tab.
Most lenders want you to bring a certified check to the closing table. Check with your bank now to find out how long it takes to issue a certified check.
Getting the check prepared a few days before closing will reduce your stress on the big day. You may have to pay a small fee for the certified check.