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The Anatomy of a Loan Estimate

Along your journey to homeownership, you’ll likely be given a loan estimate to review. A loan estimate is an extremely important document that provides a complete breakdown of your mortgage loan. It will give you information about your loan amount, interest rate, prepayment penalties, and more. Here’s what you’ll find in your loan estimate and what you need to know about it:

1. Your Personal Information and The Property Address

At the top of your loan estimate, you’ll find your personal information and property address which you should always verify. While this may seem trivial, if you later find an error with this information, it can cause issues, especially when assessing the property.

2. Your Loan Term, The Loan Type, And Rate Locks

A standard mortgage is a 30-Year conventional loan; however, there are many types of mortgages available to suit a variety of needs, including FHA, VA, and USDA loans. The mortgage term can vary from a 15-year to 20-year to 30-year. When reviewing your loan estimate, it’s important to verify the information listed in the loan estimate is the same as what you and your lender discussed and what you qualified for.

A rate lock secures a specific interest rate during the loan negotiation process before you close on your loan. If you don’t lock your rate, it could increase or decrease with the market before you sign your closing docs and close on your loan.

Your interest rate is also important to examine. If your rate is fixed, it will not increase or decrease for the life of your mortgage if you have a fixed rate mortgage. If you have an adjustable rate, you could find that your rate is much different than originally discussed when it is adjusted annually after the fixed-term expires according to your loan terms.

3. The Loan Amount

This is the total amount of money you are agreeing to borrow to purchase your home. Your Loan Originator (LO) will calculate the loan amount you qualify for based on your income, current debt-to-income ratio, credit score, and other factors. Make sure this amount is enough to cover the costs of the property and any repairs you may need to address. If it isn’t enough, you should discuss your options with your LO right away.

4. The Interest Rate

Your interest rate is an extremely important number, because it controls how much interest you’ll ultimately pay on the loan. You may be able to pay down “points” for the interest rate – paying money now for a lower rate.

You should also ask your LO about your Annual Percentage Rate, or APR. It’s possible you could also decrease the APR through other actions, such as getting a co-signer for your mortgage, or improving your credit score.

5. The Mortgage Payment (Principle and Interest)

This is the amount that you’ll be paying to the bank every month for your mortgage, and it is comprised of the principle and interest. Be aware that this isn’t the total amount that you’re going to have to pay on a monthly basis (mortgage insurance, property tax, homeowner’s insurance, and other factors will influence the totally monthly payment). Verify that this amount is what you expected.

6. Prepayment Penalty

Your loan estimate will outline if there is a prepayment penalty and how much it is. This is something you should discuss with your LO before you receive your loan estimate, so you aren’t surprised when you review the document. Prepayment penalties may be issued by your mortgage servicer for paying your mortgage off earlier than the term you agreed to, because they expect to recover all their costs over the term of the loan through interest.

7. Balloon Payment

A balloon payment means that you will need to make a larger payment at the end of the loan, though your other monthly payments during the life of your mortgage will be smaller. Some people want a balloon payment because it lets them afford a house that is larger, but it can be considered higher risk.

8. Mortgage Insurance Amount

If your down payment is less than 20%, you may need to pay for additional private mortgage insurance. This will increase the amount of your monthly payments. Private mortgage insurance can bump up your costs and will be calculated into the amount that you can afford for a house. Some types of loan, such as VA loans for eligible Veterans, service members, and their survivors, allow for little to no down payment to avoid paying PMI.

9. Estimated Tax Payments and Assessments

Often, you’ll be required to put money into an escrow account that is managed by the servicer of your loan. This money is set aside for the purpose of paying property taxes, homeowners insurance, and other home related fees. In some areas, property taxes can be veryhigh and will impact how much home you can afford to purchase.

10. Estimated Closing Costs

Your loan estimate will outline your estimated closing costs, including fees like origination charges, title fees, and more. This amount is due at closing. Typically, the total can be a few thousand dollars,but it’s important not to overlook these costs.

11. Money You’ll Need to Close

Finally, this is going to be the total cash amount you’ll need to hand over during closing. Often, this is going to include closing costs, the down payment, and potentially other costs. When home buying, it’s important to remember that your loan estimate is, quite literally, an estimate. So, when determining the amount you will need to invest into your closing costs, it’s a good idea to add a general buffer.

The Bottom Line

Getting a home loan can be a confusing process, but there are tools on hand and professionals to help guide you through. Your loan estimate is an important document to review when purchasing a home, and you should take the time to thoroughly understand it and ask questions as needed. Find your local Loan Originator to learn more and discuss your home buying options today.