Loan Estimates 101


Do you know how much your home loan will cost you? It’s a critical question that you need to ask if you’re going to be able to budget accordingly. Luckily, the answer to this can be found on the Loan Estimate, which recently replaced the Good Faith Estimate (GFE) as well as the Truth-in-Lending (TIL) disclosure statement under TRID guidelines.

Mortgage brokers and lenders are required by the U.S. government to supply the new three-page form to borrowers within three days of a home loan application. This gives borrowers ample time to review their statements and identify exactly how much their home loan will cost them in clear, easily-understood terms. As such, it will help borrowers avoid overpaying for a mortgage and sets forth the interest rate. Lower closing costs could help borrowers lower their overall mortgage payments, spend less in closing costs, or even afford a bigger home within their budget.

All lenders must use the same standard Loan Estimate and Closing Statement and are held accountable for the quotes they provide. This helps borrowers compare mortgage loans in order to make a more informed decision.

What’s Included in the Loan Estimate?

Within the Loan Estimate will be a number of crucial pieces of information about your mortgage, including the following.

Amount being borrowed.

Knowing how much you borrowed is obviously critical. This number should be located under “Loan Amount,” and if the amount is more than what you asked to borrow, it’s important to ask your lender about it. It’s possible that some of the closing costs have been included in this amount, but it’s important to inquire anyway. Knowing precisely what fees your lender is adding to your overall loan balance is essential.

Origination fees.

The amount that your lender is charging you in origination fees – which are the costs associated with the lender getting you the loan – will be included in your Loan Estimate. They will be broken down into mortgage application fees and underwriting fees and generally cost anywhere between 0.5% and 2% of the entire loan. This is a negotiable fee that you can wheel and deal with your lender, or you may even try to find a cheaper deal with another lender.

Interest rate.

The interest rate that’s tied to your loan amount can make a massive difference in the overall cost of your loan. Even the difference of a fraction of a percent can mean tens thousands of dollars in savings over the term of your loan. Make sure the rate stipulated on the form is the same as the one quoted by your lender.

Fixed-rate or adjustable-rate loan?

A fixed-rate mortgage comes with an interest rate that’s been set when the loan is originally taken out and won’t change over the life of the mortgage. An adjustable-rate mortgage, on the other hand, comes with an interest rate that can fluctuate. The interest rate may go up or down. Many borrowers who choose an adjustable-rate loan do so because the rate is typically lower compared to a fixed-rate loan.

Long before the new mortgage disclosure statements came out, many borrowers were unaware that they actually took out adjustable-rate home loans when they were under the impression that they were signing up for fixed-rate loans. When their mortgage payments started to increase, they were unpleasantly surprised. Many times the mortgage amounts were more than they could afford, placing them at an increased risk of default.

The Loan Estimate will stipulate whether or not the loan amount will increase after closing. If you’ve taken out a fixed-rate loan, your Loan Estimate form should clearly state that the loan amount will not change. Otherwise, you may have unknowingly signed up for an adjustable-rate mortgage and should speak with your lender about making the necessary adjustments.

Monthly payment amount.

You’re obviously going to want to know how much you will have to pay each and every month in order to budget accordingly, and this number will be spelled out on your Loan Estimate. The Projected Payments tab will break your loan payment down into three components – principal and interest, mortgage insurance, and estimated escrow – and how each component may change in the future.

Appraisal fee.

Before you are approved for a mortgage, your lender will want to know exactly how much the home you agreed to buy is worth. Ideally, it should be appraised at or near the price that you agreed to pay. Your lender will appoint a professional appraiser to have the appraisal done. If it comes in low, you may be denied a mortgage as the lender will not want to assume the risk of extending a mortgage for more than what the home is presently worth based on current market conditions.

The appraisal will come at a cost to you, and this fee will be stated in the Loan Estimate. Generally speaking, this expense will have to be paid to the lender before the appraisal is even conducted, and therefore before you’re approved for a mortgage.

Charges for discount points.

If you “buy down” the interest rate, this amount will be payable at closing and will be outlined in the disclosure statement. Buying down points essentially means paying an upfront fee in exchange for a lower rate. Each discount point bought down generally equates to a decrease of as much as 0.25 of a percentage point on an interest rate.

Total amount owed at closing.

You will need to show up to the closing table with the total amount owed, which will be indicated on your Loan Estimate. You’ll likely be asked to bring this payment in the form of a certified check or money order, which your lender will verify for you. Be prepared to pay an administrative fee to your bank for generating the check.

The Bottom Line

The Loan Estimate is definitely not a document that you want to gloss over quickly without going over it in detail. After all, it lists all the expenses you’ll be responsible for paying, so knowing what all these fees are before the deal is sealed will help you avoid any unpleasant and unexpected surprises. Go through this document with your lender and make sure to ask any questions if anything is unclear or seems to be inaccurate. To make sure you’re fully in-the-know about what you owe, study the figures on your Loan Estimate and compare them to what’s been outlined on your Closing Disclosure.