It used to be more complicated than it is now.
Loan estimates are the document that you can use to easily compare apples to apples or, in this instance, one mortgage offer to another. Every lender uses the exact same loan estimate form to make things easier. Within three days of receipt of your mortgage application, lenders must provide a loan estimate.
Don't be surprised if you hear a loan estimate called a "good faith estimation". To comply with the Truth in Lending Act 2015, loan estimates were replaced by good faith estimates. Sometimes the terms are interchangeable. To help consumers understand the different mortgages they have, the Truth in Lending Act was created.
It is important to take notes when speaking with loan officers. The loan overview at the top of a loan estimate gives a quick overview of your loan. You can easily compare the information in the loan overview with what the lender promised you. Before you make a decision about which lender to work with, it is important to resolve any discrepancies.
These are the eight most important pieces of information that a loan estimate should promise to include:
1. Lender terms
This section covers succinctly the following:
- The amount of the loan
- Interest rate
- Monthly principal and monthly interest
- If there is a balloon payment
2. Payments projected
This section explains how much your monthly payment can be based on the interest rate and the term of the loan (how long you must repay the loan in its entirety). It also includes a calculation of your monthly payment, which excludes estimated taxes, insurance, and assessments.
e Add the monthly principal and interest payments to each amount.
This section will indicate whether homeowners insurance and property tax will be included in the loan estimate. This is usually true, but it is not always the case.
3. Cost at closing
You will find that fees can vary from one lender to the next when you are shopping for a mortgage. Although one lender might offer a lower interest rate than another, they will charge higher loan fees than others.
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4. Cost of a loan
This section is very important. It not only lists all expenses you could face if you borrow from a lender, but also shows you which expenses can be fixed and which can be negotiated for a better deal.
Instead of having to go through all the loan documents as home buyers did in the past, you can find all expenses on one page.
5. Other costs
This section helps you to remember expenses that you may have forgotten about or never experienced. This section includes transfer taxes and recording fees. Although it may not seem like much, every little bit of information can make you a better buyer.
6. Close Calculating Cash
This section provides a deeper dive on closing costs and breaks down how the lender arrived at their total.
7. Comparisons
This short portion of the loan estimate can be very helpful when comparing loan offers. It contains three things:
- What you will see in five years. This includes how much you have paid in total payments, and how much of your loan debt you have paid off by the end of five years.
- e The APR is the actual cost of the loan. It does not reflect the interest rate. You may be charged a rate of interest of 3.25%, but the true cost of that loan is 3.55%.
- Also included is the total interest percentage (TIP). The TIP is the total interest you will pay over the term of your loan.
8. Considerations
This short summary contains all the information you need, including:
- If the lender requires homeowners insurance. Spoiler alert: They do.
- What happens if your payment is late?
- The lender's intention to service the loan or transfer servicing to another party
Although it is difficult to get excited about standard forms, the loan estimation is unique. This breaks down complex purchases into manageable, bite-sized pieces. It makes you a smarter home buyer.
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We believe in the Golden Rule. This is why our editorial opinions are entirely ours and have not been reviewed, approved or endorsed previously by any advertisers. The Ascent doesn't cover all available offers. The Ascent does not cover all offers on the market. e The Motley Fool recommends Apple shares. The Motley Fool recommends Discover Financial Services. It recommends the following options: Long March 2023 $120 calls for Apple, and Short March 2023 $130 calls for Apple.
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