What is a Loan Estimate?
A Loan Estimate is a standardized mortgage disclosure that gives you a snapshot of important loan terms, projected payments, estimated closing costs, and estimated cash needed to close. It is designed to help you understand and compare mortgage offers before moving forward.
Page 1: Loan terms, payment, and cash to close
Page 1 gives a high-level view of the loan amount, interest rate, monthly principal and interest payment, whether the rate can change, and the estimated total monthly payment. It also summarizes estimated closing costs and estimated cash to close.
- Loan amount: The amount being borrowed before any final adjustments.
- Interest rate: The note rate used to calculate principal and interest.
- Monthly payment: Often begins with principal and interest, then includes projected taxes, insurance, and mortgage insurance when applicable.
- Estimated cash to close: The estimated amount you may need at closing after credits, deposits, and financing terms are considered.
Interest rate versus APR
The interest rate and APR are not the same thing. The interest rate affects the monthly principal and interest payment. The APR is designed to reflect the cost of credit by including the interest rate plus certain finance charges.
Simple way to think about it: the interest rate helps explain the payment, while APR helps compare the cost of borrowing between loan offers.
- A lower interest rate does not always mean the lowest overall cost.
- APR can rise when discount points or certain lender fees are included.
- APR is useful when comparing similar loan types and terms.
Discount points and lender credits
Discount points and lender credits can change the relationship between rate, closing costs, and monthly payment. A borrower may choose a lower rate with higher upfront cost, or a higher rate with a lender credit to reduce closing costs.
- Discount points: An upfront cost paid to obtain a specific rate structure.
- Lender credit: A credit from the lender that may offset closing costs, usually in exchange for a different rate.
- Important comparison: Always compare rate, APR, points, lender credits, and cash to close together.
Page 2: Closing cost details
Page 2 breaks down the costs that make up the Loan Estimate. It separates loan costs from other costs, which helps borrowers understand what is charged by the lender, what is paid to third parties, and what is collected for prepaid items or escrow setup.
- Origination charges: Lender-related costs and points, if applicable.
- Services you cannot shop for: Items selected by the lender or required provider.
- Services you can shop for: Items where you may be able to choose a provider.
- Taxes and government fees: Recording fees and transfer taxes when applicable.
- Prepaids and initial escrow: Items like prepaid interest, homeowners insurance, property taxes, and escrow reserves.
Prepaids and escrow are not the same as lender fees
Many borrowers see prepaid items and escrow deposits and assume they are lender fees. They are different. Prepaids and escrows are amounts collected for items such as taxes, insurance, and prepaid interest. These may be required based on the loan structure and closing date.
- Prepaid interest: Interest collected from closing through the end of the month.
- Homeowners insurance: Often collected upfront for the first year.
- Escrow setup: Funds collected to start the tax and insurance escrow account.
Page 3: Comparisons and other considerations
Page 3 includes comparison tools and additional information about the loan. This section can help you compare offers, but it should be reviewed together with the details on Pages 1 and 2.
- In 5 years: Shows estimated total paid and principal reduction during the first five years.
- APR: Shows the annual percentage rate for comparison purposes.
- Total interest percentage: Shows interest paid over the loan term as a percentage of the loan amount.
- Other disclosures: Includes information about appraisal, assumption, servicing, late payments, and related items.
What can change before closing?
Some items on a Loan Estimate may change before closing, especially when final third-party fees, property taxes, homeowners insurance, escrows, or borrower-selected services are confirmed. The Closing Disclosure is the final settlement disclosure provided before closing.
- Homeowners insurance can change once the final policy is selected.
- Property tax and escrow estimates may change based on county data and closing timing.
- Title and settlement fees can vary depending on provider and transaction details.
- Rate lock changes, loan amount changes, or program changes can affect final numbers.
How to compare two Loan Estimates
The best comparison is not simply choosing the lowest payment. A good comparison looks at the full structure of each offer.
- Compare the same loan amount, loan type, and loan term whenever possible.
- Compare interest rate and APR side by side.
- Review discount points, lender credits, and origination charges.
- Separate true lender costs from prepaid items and escrow deposits.
- Ask whether the rate is locked and how long the lock is valid.
Common mistakes borrowers make
- Comparing one locked rate to another quote that is not locked.
- Looking only at monthly payment without reviewing points or cash to close.
- Assuming prepaid taxes and insurance are lender fees.
- Ignoring whether the loan type, term, or occupancy assumption is different.
- Comparing APRs across loans that are not structured the same way.
Want help reviewing a Loan Estimate?
If you have a Loan Estimate and want help understanding the numbers, we can walk through the rate, APR, points, lender credits, closing costs, and estimated cash to close so you can make a more informed decision.
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