Mortgage Loan Estimates
When you apply for a mortgage it can be really hard to keep track of all of the different jargon and options (we have some help here.) Different lenders may use different terms for the same thing, or may offer different features and options. Luckily, there is a way to compare apples to apples.
Within three days of receiving your application a lender must provide you with a standardized three page document called a “Loan Estimate.” The purpose of this document is to give you a way to directly compare loan offers early in the process, before you have paid much, if anything, in application fees. There are too many things included in the Loan Estimate to cover them all, but a few of the most important are below. It’s also important to note these aren’t guarantees. They are estimates based on the information the lender has at the time, and the final figures may be different.
The Loan Amount: – dollar amount you are borrowing.
The Interest Rate: the interest rate you’ll pay on the loan as you pay it back.
Monthly Principal & Interest: the projected majority (but not necessarily all) of your monthly payment you’ll be expected to make.
Special Features: does your loan includes a pre-payment penalty or balloon payment (a large lump sum payment due all at once late in the term of the loan)?
Total Monthly Payment: an estimate of principal, interest, mortgage insurance, and escrow (funds held to pay property taxes usually) all together; this is what they expect you to be able to pay every single month.
Closing Costs: estimates of what is included in your closing costs and how much each item is costing you (things like appraisal fees, title search, application fees, initial property tax and mortgage insurance payments, etc).
Cash to Close: your estimated closings costs plus down payment amount and any other adjustments. This number is important, it’s what you’ll need to have in cash by the closing date.
Annual Percentage Rate (APR): an all-in-one number that takes into account all of your costs over the length of the loan, it’s not the same as your interest rate. Good for comparing offers, lower is better if all else is equal.
Total Interest Percentage (TIP): a percentage that tells you how much more than the amount you’re borrowing you’ll pay in interest over the life of the loan. If you borrow $100,000 and the TIP is 50% that means you’ll pay a total of $150,000 over the full term of the mortgage; $100,000 principal and $50,000 interest.