What Is a Loan Estimate?
How to Understand Your Loan Estimate When Shopping for Mortgages
A loan estimate is an official form that breaks down the costs you can expect with a certain mortgage offer. The form contains sections on the loan amount, interest rate, closing costs, and more, and is three pages long. Lenders are required to provide you with a detailed loan estimate within three days of your application.
Loan estimates are not required for home equity lines of credit (HELOCs), reverse mortgages, loans secured by a mobile home, or a home not attached to land, among other exceptions.
Using the Loan Estimate to Compare Your Mortgage Options
Loan estimates allow you to see how different lenders’ loans compare in cost, terms, rate, and other details. It’s smart to shop for at least three home loan estimates from three different financial institutions.
When looking at several loan estimates, you’ll first compare the general features of the loans you’re considering. Make sure they have the same type of rate (fixed vs. adjustable) and that they were issued around the same time. Interest rates change daily, so getting your estimates a few days apart can impact your quoted costs.
Here are the sections you’ll see on your loan estimate:
|Loan Estimate Term||Meaning|
|Loan Terms||This area will include your loan amount, your interest rate (how much you’ll pay to borrow the money), your estimated monthly principal & interest payment, and details regarding the loan’s prepayment and if the loan has a balloon payment.|
|Projected Payments||Here, you’ll see details regarding your expected monthly mortgage payment over the life of your loan. This amount should include principal and interest, along with taxes, insurance, or homeowner association dues. These can all vary.|
|Costs at Closing||This section contains the total closing costs you can expect, (including prepaid insurance, appraisal fees, origination fees, and more) and the total you’ll need to bring to the closing table (including your down payment).|
|Loan Costs||These are the costs associated with underwriting, originating, and processing your loan, as well as any title-related fees. These all go toward your closing costs and cash-to-close numbers.|
|Other Costs||In this area, you’ll find things not controlled by your lender or title company—items like taxes, transfer fees, prepaid interest, homeowner’s insurance, and more. These also contribute to your closing costs and cash-to-close totals.|
|Cash to Close||The total of your loan costs, down payment, any seller credits, your deposit, and other adjustments.|
|Comparisons||Use this section to compare different loan offers in terms of principal versus interest and other fee totals you will have paid off in five years. It also contains the annual percentage rate, and total interest percentage, which is the amount of interest you’ll pay over the entire loan term, expressed as a percentage of your mortgage loan amount.|
|Other Considerations||Finally, you’ll come to a few statements about the terms of your loan, including late payment, refinance and whether the bank plans to service your loan or transfer servicing. These will vary by lender, so be sure to read them carefully.|
Saving Money On Your Loan Estimate
To save money on your mortgage loan, pay attention to the “Services You Can Shop For” section on the second page of your loan estimate. These are the services and fees you’re free to comparison-shop for.
Typical shoppable services and fees might include pest inspection, the survey fee, and costs associated with the house title. Feel free to do some legwork, call up providers for quotes, and try to negotiate a better deal than what you see on paper. Saving just a few hundred dollars could offset moving costs or help buy new furniture or decor.
To negotiate a better estimate with a potential lender, such as paying points to lower your interest rate, multiple loan estimates are your best bargaining tool, according to the Consumer Financial Protection Bureau. You can always return to a lender and ask for a better loan estimate.
Loan Estimate vs. Closing Disclosure
A loan estimate shouldn’t be confused with a closing disclosure. A closing disclosure is a longer document detailing the finalized costs you’ll actually pay when closing on that loan, and lenders are required to issue a closing disclosure within three business days of your closing date.
Here are a few ways the two documents differ:
- Finality. A loan estimate is meant to give you an estimate of the costs you can expect with the possible loan. It’s subject to change. A closing disclosure will contain your selected loan’s final details, including amount and interest rate, monthly payment, closing costs, and amounts of down payment and prepaid insurance, interest, and property taxes. Any credits you’re receiving from the lender or seller will also be noted.
- Length. Loan estimates are only three pages, while closing disclosures are five.
- Delivery. You’ll get your loan estimate after providing some basic information to your lender. You’ll get your closing disclosure three days before your closing date (at the latest).
- Data required. Your lender only needs a few data points to process a loan estimate. But you’ll need a finalized sales contract and a fully processed loan application before you’ll get a closing disclosure.
Compare the disclosure to the original loan estimate you received, to ensure accuracy.
Costs may change on some items, but on others, increases are not legally allowed—at least not without a revised loan estimate in hand. Ask your lender before your closing date, if you have questions about an increased or changed charge since your loan estimate.
The Bottom Line
If you shop around for your mortgage loan, you should approach several lenders and get multiple loan payment calculations. These can help in comparing your options, as well as the costs and terms each one comes with. Be sure to review your estimates carefully to ensure you make the best decision for your finances.
Consumer Finance Protection Bureau. "What is a Loan Estimate?" Accessed March 5, 2020.
Consumer Finance Protection Bureau. "Loan Estimate and Closing Disclosure: Your Guides in Choosing the Right Home Loan." Accessed March 5, 2020.