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How to Read Your Loan Estimate (and Potentially Save Thousands)

2021-11-18

Updated: December 23, 2021

Buying a home is a significant step and a large financial transaction, so it’s important to understand the details of each of them if you are comparing mortgage loan offers from several lenders. The Loan Estimate (LE) details everything you need to know about a mortgage’s upfront and long-term costs. It’s vital that you review the LE thoroughly and carefully evaluate your loan options, as it may save you thousands of dollars.

What Is a Loan Estimate?

Your Loan Estimate summarizes all the terms of your loan, such as your interest rate, monthly payments, and any estimated closing costs. By law, all Loan Estimate forms use the same template to make it easier for you to compare offers — if you know how to read it.

What Appears on a Loan Estimate?

If you’re wondering how to read a Loan Estimate, you first need to learn what it includes. The document is divided into three pages:

  1. Loan Details
  2. Closing Cost Details
  3. Additional Information About the Loan

Reading Your Loan Estimate

Understanding your Loan Estimate document is easy when you know what you’re looking for. Use this section as a guide to learn how to read a Loan Estimate and you’ll be able to hone in on the information you’re looking for.

Reading Page 1 of a Loan Estimate

Page 1 of your LE is a high-level summary of the loan terms, broken up into three sections:

  1. Loan Terms: A summary of the loan term, amount, and initial payment.
  2. Projected Payments: Information on the initial escrow payments, property tax rate, and homeowners insurance.
  3. Costs at Closing: Estimated closing costs and fees.

As you review page 1 of the Loan Estimate, be sure to double-check the following areas:

  • Loan Term, Loan Type, and Rate Lock: In the top right corner, you’ll find information on the loan term, type, and whether or not your rate is locked. Verify that the length and type of loan (conventional, VA, or FHA) is correct. Also check to see if your interest rate is locked. If it’s not, it could change before your loan application is approved, which would impact your costs over time.
  • Estimated Total Monthly Payment: Under the Projected Payments section, you’ll find your predicted monthly payment amount. This number includes taxes, principal, and interest as well as any other relevant charges.
  • Costs at Closing: The third section of the page includes two lines with similar names. The first line, “Estimated Closing Costs,” are the fees you’ll pay to your lender to close on your loan. The second line, “Estimated Cash to Close,” is the total amount you’ll need to bring to complete the purchase of your home.

Reading Page 2 of a Loan Estimate

Page 2 of the LE provides in-depth line item prices of the loan costs, other costs, and cash-to-close. The most important parts are:

  • Origination Charges (Loan Costs, Section A): This details your total financing costs, including any lender fees such as administration charges for setting up your loan.
  • Services You Can Shop For (Loan Costs, Section C): Highlights areas where you might be able to save money by shopping with a third-party vendor.
  • Calculating Cash to Close: This section breaks down your Cash to Close amount that’s listed on page 1.

Reading Page 3 of a Loan Estimate

Page 3 of your Loan Estimate is what you’ll use to compare competing offers from different mortgage lenders. It includes:

  • How much you will have paid after five years.
  • The loan’s Annual Percentage Rate (APR), which is the total cost of the loan including fees, shown as a percentage.
  • The total amount of interest you will have paid over the duration of the loan term, or Total Interest Percentage (TIP).
  • Other considerations such as appraisal, homeowners insurance, late payments, etc.

Two other important parts of your LE you should review when comparing offers are: 1) whether or not the interest rate is locked (page 1); and 2) application and underwriting fees (page 2, Loan Costs Section A).

How Accurate Is a Loan Estimate?

Loan estimates are generally pretty accurate. By law, final loan costs must be within 10% of the amount shown on the LE. Mortgage rates change daily, however, so if you are getting a loan estimate from more than one lender, you’ll want to try to get them all on the same day so that you’re seeing an accurate comparison.

The terms on your Loan Estimate are binding for 10 days from the day you receive the document. Lenders cannot change the rate or terms offered in the LE as long as you start the process within 10 days. However, there are exceptions for major changes to the loan or application.

Does a Loan Estimate Mean You’re Approved for a Mortgage Loan?

No. While a loan estimate tells you what the loan terms of a mortgage are that the lender intends to offer should you move forward with the loan, things can change, particularly if you do not provide the necessary documentation required by the lender. If something on your application cannot be documented — especially things like income, debt, etc. — your loan estimate terms can change.

AAFMAA Mortgage Services LLC Can Help

AAFMAA Mortgage Services LLC (AMS) offers a wide range of low-rate and low-cost mortgages, and specializes in working with military families. If you have questions, need help, or are ready to apply, contact an AMS Military Mortgage Advisor online or call (855) 929-3977 today.