Are you ready to get financing for your dream home? If so, your prospective lenders will provide a loan estimate after you complete a mortgage application. The estimate spells out your loan fees and discloses the house price estimate along with how much of your total payments over the life of the loan are dedicated to interest.
The information included in a loan estimate is consistent from lender to lender due to federal regulations. The Consumer Financial Protection Bureau, or CFPB, dictates the information disclosed in the loan estimate and has done so since October 2015. By using the house estimate, you can compare costs across lenders and the terms of the loan in a format that’s simple to decipher.
Judy Dutton, Deputy Editor at Realtor.com, said shopping around for different lenders with your loan estimate is the best way to lower closing costs.
“In fact, so many home buyers shop for a home before they shop for a loan,” Dutton said. “They should shop for a loan first. This will not only help them get a handle on what priced home they can afford but can put them in a stronger negotiating position to lower the cost of a home.”
What is a loan estimate?
A loan estimate is three pages that cover a lot of information. You need to review the estimate carefully to fully understand your loan offers, from your basic details, such as name and address, on down. According to the CFPB, every detail is important and even minor errors, such as a basic misspelling of your name, could cause issues later.
This document must be provided to you within three business days after the lender receives your application. All relevant loan data, including estimated monthly payments, the cost of interest and your interest rate are included. You can also review other costs associated with the loan, such as recurring taxes, one-time costs, fixed fees and negotiable fees.
It is important to note the loan estimate is designed to provide the potential terms of your loan. Lenders will request additional financial data from you to complete the loan documents. However, the ability to change terms is limited, particularly in certain cost categories.
8 critical questions your loan estimate will answer
1. How much money am I borrowing?
The total amount of your loan is specified in the loan terms section. A breakout box at the top of the loan estimate also specifies the length of the long term, the mortgage type — such as fixed or adjustable — and the loan type.
2. What are my loan terms?
The loan terms section also specifies other key details, such as your interest rate, monthly principal, interest owed and whether a balloon payment is due. A balloon payment is a special payment at the end of your loan term that is larger than your other monthly payments. It can range from double a monthly payment to several times more.
The document will also detail the amount of any prepayment penalty and the number of years you may owe a prepayment penalty. For example, it could state you must pay as much as $3,000 if the loan is paid off in the first two years. If a penalty is not assessed, the prepayment penalty box will feature a “no” entry.
If your interest rate is locked in the loan estimate, that means it is your rate until the date specified on the loan estimate passes or closing is completed by a specified date. If the rate is not locked, it is subject to change over time.
3. What are the projected payments?
The projected payments section features a repeat of your principal and interest payment total as well as additional charges. This includes the cost of mortgage insurance and estimated escrow costs, such as insurance premiums and taxes.
The loan estimate includes projections for the first several years of your loan as well as subsequent years. Costs reflected here may vary during these different time periods. For example, as you establish more equity in your home, mortgage insurance is no longer required, and this cost is removed.
4. How much will this new mortgage cost me?
Closing costs associated with your mortgage loan are broken down across several sections. Loan costs specify the charges the lender is assessing for the loan. These include upfront fees like origination fees, application fees, underwriting fees and mortgage points. According to the CFPB, comparing origination charges is a key way to determine if you have a competitive loan offer.
5. Am I being charged for mortgage points?
You can purchase mortgage points to lower loan rates. The points are paid for up front at closing to lower the interest rate for the life of the loan. The purchase price of each point is 1% of the loan amount. On a $200,000 loan, one point would cost $2,000. The amount of the interest rate reduction you receive is set by the lender. A point charge may be reflected as a whole point or a portion of a point, such as 0.25%. The cost of the point is included in the loan cost section.
6. What are the closing costs and other costs?
Closing costs also includes a variety of other fees associated with purchasing home. Some are fixed while others provide you with the opportunity to shop around. Fixed costs include appraisal fees, credit report costs and tax research. You can shop around for things like pest inspections, surveys and various title-related fees.
Additional sections of closing costs include taxes and other charges you may incur with local municipalities, such as the cost of recording the purchase. Prepaid items, such as homeowners insurance, mortgage insurance and a set amount of property taxes also fall under the heading of closing costs.
7. How much cash do I need to close?
The cash you need to close is specified on the second page of the loan estimate. It includes all closing costs, and the down payment is added to the total. If you prepaid any portion of your fees or made a deposit, it is deducted before the cash-to-close is calculated.
8. What does my loan cost compared to other loans?
In addition to the origination charges, the comparison section of the loan estimate provides an opportunity to compare your loan to the terms offered by other lenders. To ensure that you have an accurate comparison, make sure you are reviewing the same type of loan from each lender, such as a 15-year fixed interest FHA loan or a 30-year conventional.
The comparison section lets you see the amount of money you will pay toward the loan in the first five years broken down into the portion of your payment that attacks principal and and the amount dedicated to interest. It also includes the annual percentage rate, or the actual cost of your loan over the term of the loan, and the total interest percentage. TIP expresses the total amount of interest you pay as a percentage of the loan total.
The bottom line
The loan estimate is a helpful tool for comparing the various offers you receive from lenders when you are contemplating a mortgage. It allows you to compare and contrast loan terms and understand the full cost of borrowing money to purchase a home. You can review monthly payments for the life of the loan and see how much you will spend on interest over time.
The loan estimate also helps you protect yourself as you move toward closing. If you lock in an interest rate, many of the loan costs may stay the same. Other costs are fixed. Unless you experience a massive credit dip or an alternate situation arises with the home during the buying process, you can rely on the estimate as a guide to your total costs with a particular lender.