8 things a loan estimate will tell you about your mortgage
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As confusing as shopping for a mortgage might seem, it used to be even more confusing. To help consumers better understand the details included in a mortgage lender’s loan offer, loan estimates have been 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, each 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 called a “good faith estimate,” don’t be surprised. Loan estimates replaced good faith estimates in 2015 to comply with truthful lending law, and the terms are sometimes used interchangeably. in Lending Act was designed to help consumers better understand the mortgages available to them.
I hope you take notes when speaking 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 any notes, you can compare what was promised to you by the lender against what is included in the loan overview. If there are any discrepancies, it’s time to correct them before making a final decision on which lender you prefer to work with.
Here are eight essential pieces of information that a loan estimate promises to provide:
1. Loan conditions
This section briefly covers the following:
- Amount of the loan
- Interest rate
- Principal and monthly interest
- If there is a penalty for prepayment
- If there is a lump sum payment
2. Scheduled payments
This section outlines how much you can expect your payment to be based on the interest rate and the length of the loan (how many years you have to pay off the loan in full). It includes a payment calculation, excluding estimated taxes, insurance or valuations.
To determine an amount closer to what you will actually have to pay each month, estimate the property taxes and call your insurance company to get an idea of the likely amount of home insurance premiums. Divide each amount by 12 and add it to the monthly payment of principal and interest.
This section of the loan estimate will also indicate whether your property taxes and home insurance will be included in an escrow account. This is normally the case, but it is not universal.
3. Cost at closing
One thing you will discover while shopping for a mortgage is that the fees vary depending on the lender. While a lender may offer you a slightly lower interest rate, you will need to make sure that they don’t make up the difference by charging higher loan fees than other lenders.
This section of the loan estimate includes two important pieces of information: the expected amount of your closing costs and the amount of money you need to bring to closing.
4. Cost of the loan
You will want to pay special attention to this section of the estimate. Not only does it detail all the expenses you can expect if you choose to borrow from a particular lender, it also tells you which expenses are fixed and which you can look for (in hopes of finding a better deal). .
Rather than digging through loan documents like buyers of old had to, you can easily find all expenses – large and small – on one page.
5. Other costs
This section of the handout helps you remember expenses that you may have forgotten or never experienced. This includes things like registration fees and transfer taxes. It may not seem important, but every little bit of information makes you a more informed shopper.
6. Calculate liquidity to close
This section takes a deeper dive into closing costs, breaking down how the lender calculated their total.
This brief part of the loan estimate can be most helpful when comparing one loan offer to another. It includes three things:
- Where you will be in five years, including how much you will have paid by then in terms of total payments and how much on your loan you will have paid off after five years.
- The annual percentage rate (APR). Unlike the interest rate, the APR reflects the actual cost of the loan, including fees. For example, you can have an interest rate of 3.25% but the “true cost” of this loan is 3.55%.
- The percentage of total interest (TIP) is also included. The TIP is the total amount of interest you will pay over the life of the loan.
8. Other considerations
This brief, catch-all segment includes information you need to know, including:
- If the lender requires a home appraisal
- If the mortgage is assumable when you sell
- If the lender requires home insurance (spoiler alert: they do)
- When your payment is considered late and what happens at that time
- If you are allowed to refinance the loan
- If the lender intends to manage the loan themselves or to transfer the management to another party
While it is difficult to get excited about most standard forms, the loan estimate is unique. He breaks down a complex purchase into easy-to-understand, bite-sized chunks. Best of all, it makes you a smarter home buyer.
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