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- A loan estimate lays out your mortgage terms, and it's useful for comparing offers from several lenders.
- It explains how much you are borrowing, which closing costs you will pay, and what your monthly payments will be.
- You should get a loan estimate within three days of applying for a mortgage loan.
When you apply for a mortgage, the lender gives you a loan estimate. This document explains the terms of your mortgage and how much you will pay.
You can apply for a mortgage with multiple mortgage lenders and receive a loan estimate from each. This strategy allows you to compare detailed offers from each lender and get the best deal.
What is a loan estimate?
A loan estimate is a standard form used by all mortgage lenders. Lenders are required to give you one when you apply for a loan.
Definition and purpose
Loan estimates are designed to standardize the mortgage-shopping process. They make it easier for borrowers to compare loan terms and lenders when shopping for a mortgage loan.
Loan estimates are used with all types of mortgage loans, except for reverse mortgages.
When and why you receive a loan estimate
Loan estimates are issued after you fill out a lender's application — within three days or less. The form will detail the terms of the loan they're offering you. You can then use this to compare different lenders on terms, interest rates, closing costs, and other details.
Components of a loan estimate
Loan estimates are three-page documents that contain a lot of information regarding your mortgage loan. Always pay special attention to these key components of a loan estimate:
Loan terms
The first page shows the basics of your mortgage. You'll see the sale price, mortgage amount, and interest rate. You'll also see which type of mortgage you're getting (for example, a fixed vs. adjustable rate mortgage and a conventional mortgage vs. an FHA loan), and how long your rate is locked in for.
The page also tells you how much you will pay each month and at closing.
Projected payments
The first page also tells you how much your mortgage payment will be each month, including a detailed breakdown of how much will go toward principal and interest, how much mortgage insurance you're paying, your estimated escrow costs, and how these will change as you get further into your loan's term.
Costs at closing
At the bottom of the first page, you'll find your total estimated closing costs, as well as the total cash you will need to bring to closing.
The latter number will be larger, as it includes both the closing costs and the remainder of the down payment you have left to pay (assuming you have already made an earnest money deposit.) An earnest money deposit shows you're serious about buying the home, and the seller takes it off the market. Then, you'll submit the rest of your down payment at closing.
Closing cost details
The second page breaks down where all those closing costs came from and what you're being charged for. It will also list which fees are set in stone and which ones you can shop around for. You may choose to use the companies recommended by the lender for tasks like pest inspections, or you can look for another company that offers lower prices.
Once you own the home, you will likely pay for things like property taxes and homeowners insurance every month. However, some lenders require you to pay for a chunk of these expenses at closing. Page 2 will tell you if this is the case.
How to use a loan estimate
Loan estimates can serve two purposes. First, they can help you compare loan offers from different mortgage companies. They can also be helpful negotiation tools, allowing you to potentially snag a lower rate or better mortgage terms. Here's how to use your loan estimates.
Comparing loan offers
Since loan estimates are standardized forms, they make it very easy to compare loan offers from one mortgage company to the next. When comparing loan estimates from different lenders, just pull up each estimate side by side, and go through each line item.
You can really see the difference between loan offers on page 3, where you'll see the loan's annual percentage rate, total costs in five years, and total interest percentage (the amount of interest you'll pay over your entire loan term).
Negotiating with lenders
You can also use loan estimates to negotiate with lenders. If one lender is offering you a better rate or terms than another, use their loan estimate to negotiate with other companies you applied with. They may be willing to make you a better offer in order to win your business.
Understanding key sections
Loan estimates are pretty detailed, so it can be hard to know where to look. Here are the key sections you should focus on when evaluating your loan estimates.
Interest rate and APR
The interest rate is how much you'll pay the lender in exchange for borrowing the money, while APR — or annual percentage rate — reflects both the fees and interest you'll pay annually on the loan. APYs are slightly higher. (A quick note: When evaluating APR and interest rates in loan estimates, be wary of any APR that's significantly higher than the interest rate. This could indicate lots of hidden fees.)
Even small differences in interest rates and APYs can equate to big savings. They can reduce your monthly payment and save you thousands in long-term interest.
Fees and closing costs
Not all lenders charge the same fees — for instance, some will not charge an origination fee or application fee, while others will.
There are also big discrepancies in how much lenders charge for their fees, so make sure you compare the fees on page 2 closely when weighing your loan offers.
Prepayment penalties and balloon payments
Some lenders charge you extra if you pay off your loan early. These are called prepayment penalties and are listed on page 1 of the loan estimate.
You should also check this page to see if your loan includes a balloon payment. This essentially means you'll owe the entire loan balance all at once when you reach a certain point in the loan term.
Tips for evaluating loan estimates
Loan estimates can be a valuable tool when shopping for a mortgage loan. Make sure you take these steps while evaluating yours.
Identifying red flags
Being able to identify red flags in a loan estimate review can help you choose the best loan.
Some common ones to look for include:
- Lots of junk fees in the "origination charges" section on page 2
- Fees or terms that don't match what your loan officer previously told you
- Unnecessarily high fees compared to other lenders
- Significant differences between the interest rate and APY
- Hefty prepayment penalties or balloon payments
- Interest rates that are significantly lower than what others are offering
If a lender offers you much lower rates than another, check the terms of the loan carefully. There may be an introductory period, and your rate will increase significantly after that. They also may be including lots of mortgage discount points, which you'll have to pay for at closing.
Asking lenders questions
Don't be afraid to question certain fees or charges if you're not sure what they are. You can also ask your loan officer to explain exactly what each fee goes toward and whether there's wiggle room on any. You'd be surprised how effective these loan estimate negotiation strategies can often be.
Considering long-term costs
The "comparisons" box on page 3 of the loan estimate is a great way to assess the total long-term costs of the loan you're being offered. If you plan to be in your home for the long haul, pay close attention to these numbers when comparing loans.
FAQs
A loan estimate is a standardized document lenders will give you within three business days of applying for a mortgage. It outlines the terms of the mortgage, projected payments, and closing costs, helping you compare offers and make informed decisions.
Use a loan estimate to compare interest rates, APRs, lender fees, terms, and other costs detailed in the loan estimate. This comparison helps you understand the total cost of each loan, ensuring you choose one with the most favorable terms.
Key areas of a loan estimate include the interest rate, APR, lender fees, and the total costs at closing section. Also, review potential prepayment penalties and whether there's a possibility of balloon payments in the future.
If one lender offers a lower rate or better terms, show the loan estimate to other lenders. Then, ask if they can match or even beat those terms.
Be wary of unusually high fees, penalties for early payment, and significant differences between the interest rate and APR. These can indicate higher fees or additional risks that are not immediately apparent in a loan estimate.
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