Shopping around for a new mortgage can be a great way to save money but you’ll need to learn how to properly read a mortgage loan estimate.

What is a loan estimate?

A loan estimate is a three-page document that tells you everything you need to know about a prospective mortgage, including upfront costs, fees, interest rate, terms, monthly payment and any other related expenses.

One simple format

All lenders are required to use the same layout for loan estimates. Once you learn the basics, you can easily compare two loans, even if you aren’t a mortgage professional.

Here are the most important items to highlight on each page.

Page 1

The first page covers all the high-level information related to the loan:

• Loan term and type: Always double check that the loan estimate shows the terms you want.
• Interest rate: The interest rate shown on the front page can sometimes be a bit confusing. On page two we’ll find out how many points you need to pay to get this exact rate.
• Estimated monthly payment: Below the interest rate in the loan terms section, you’ll find the monthly principal and interest, and if you move down to the projected payments section, you can find your estimated total monthly payment including taxes and insurance.
• Cash to close: The estimated cash to close is how much money you need to provide upfront, including your down payment, lender fees, closing costs and third-party charges.

Page 2

The second page of the estimate shows how the estimated cash to close was calculated. Be sure to look for:

• Points: This is how much money you pay to buy down your rate to the number shown on page one. This number is shown as a percentage of the loan and as a dollar amount.
• Application and underwriting fee: This is the amount charged by the lender to originate your loan.
• Services: Page two divides expenses into two categories. Services you can’t shop for and services you can. The first list is predetermined by the lender and you cannot look for a better price, but for services you can shop for you have the option to find your own inspector, title company, etc.

Page 3

The final page includes an important figure you’ll want to use to compare different mortgage options–your APR. The annual percentage rate represents the total cost over the life of the loan, including interest, points and all upfront expenses.

For homeowners who don’t plan to stay in the home for a long time, look for how much principal you will have paid off on the loan “in 5 years.” The “in 5 years” number makes it easier to compare the weight of upfront costs versus getting a better interest rate in the short-term.

Need help?

If you’re still confused about which loan estimate is better for you, speaking with a mortgage broker can help.

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