Understanding the Loan Estimate

If you’re shopping for a mortgage, you have probably heard the term loan estimate.

This article takes a look at loan estimates, what they are, and how to use them to negotiate better terms on your mortgage.

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What is a Loan Estimate?

A loan estimate is a document from a mortgage lender that breaks down all the loan costs, including the interest rate, closing costs, and other lender fees for a mortgage loan.

The lender must provide the loan estimate within three business days of receiving your loan application.

The loan estimate also provides information about the estimated taxes and insurance and how the mortgage rate and monthly payments could change in the future. Any special features will also be spelled out like pre-payment penalties or negative amortization.

A loan estimate does not mean you have been approved for the mortgage. All loans must be sent to underwriting to be processed and finalized before closing.

Loan estimates are not provided to consumers who are applying for a reverse mortgage.

Which set of Items Appears on a Loan Estimate

The loan estimate will include the details about the loan, the fees, and total costs.

Items that Appear on a Loan Estimate

Estimated interest rate

The interest rate is an estimate based on the current prime rate, it can change before you lock-in your rate.

Monthly mortgage payment

The mortgage payment is the estimated total cost of the principal and interest payments monthly. The payment can change before closing.

Closing costs

Closing costs are fees charged by the lender. Typical costs are between 2% - 5% of the loan amount, including the loan origination fee, title search, survey, etc.

Property taxes

An estimate of the annual property taxes on the home.

Mortgage insurance

The mortgage insurance premium, or private mortgage insurance rate will be detailed in the estimate.

Cash to close

An estimate of the amount of cash the borrower will be required to bring to closing.

Discount points

If your loan include discount points the price paid and the amount of discount points will be included.

Sample Loan Estimate

loan estimate example

View sample loan estimates and see how to read it here.

Using the Loan Estimate to Negotiate Better Terms

The loan estimate is made to be as clear as possible to help homebuyers understand the mortgage loan terms and conditions. Each lender must use the same standard loan estimate form, making it even easier to compare loan offers from multiple lenders.

  • Complete application with at least three different lenders
  • Compare each loan estimate separately.
  • Contact the lenders and ask them to beat the estimate with the lowest costs.

When you get a mortgage, it’s vital to compare rates and fees with multiple lenders to ensure you’re getting a competitive deal on your home loan. The loan estimate lets you do this as easily as possible.

Get at least 3 to 4 loan estimates from different lenders, and compare the interest rate, closing costs, loan terms, and other fees. There’s a pretty good chance these numbers vary widely; don’t worry, it’s completely normal.

You can use these loan estimates to negotiate better terms with each lender.

When shopping for mortgage rates, you have a rate shopping window of 30-days. A rate shopping window is the period of time you can have multiple lenders pull your credit while only counting as a single credit inquiry.

The Bottom Line

A loan estimate explains to borrowers the basic terms of the mortgage and provides the interest rate, closing costs, and other fees.

The loan estimate must be provided to you within three business days of receiving your loan application.

You can use loan estimates to help you negotiate better terms on your mortgage.

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