How to read a Loan Estimate | Crunch My Mortgage

A lender must give you a Loan Estimate within three business days of receiving a mortgage application. The form is standardized. Page 1 is the loan you are being offered. Page 2 is the itemized costs. Page 3 is how that offer compares with others and which features can change later. The figures are estimates. The Closing Disclosure, delivered before you sign, is the later form with the final amounts. This page follows the CFPB’s own explanation of the form. It is not a lender’s worksheet.

Page 1: the loan, the payment, and the cash

The top of page 1 names the lender, the applicants, the property, the price or the estimated value, and the loan type: conventional, FHA, or VA, and fixed or adjustable. The sale price is not the loan amount. The loan amount is the price minus the down payment, plus any costs you choose to finance.

Loan terms list the loan amount, the interest rate, the monthly principal and interest, and whether the loan has a prepayment penalty or a balloon payment. Each of those can be marked yes if it can rise later. On a fixed-rate loan the principal-and-interest line should stay put. Taxes and insurance are not in that line. They show up in the projected payments.

Projected payments break the monthly bill into principal and interest, mortgage insurance, and estimated escrow. Escrow is the lender’s estimate of property tax and insurance, divided into a monthly deposit. It is an estimate because tax bills and insurance premiums change. If mortgage insurance drops off on a schedule, the form can show more than one column of payments.

Costs at closing is the box people quote first. It has two numbers. One is cash to close: what you bring, or sometimes what you receive. The other is the total of closing costs. They are not equal. Cash to close starts from the closing costs, adds the down payment, and subtracts credits and the earnest money you already paid. The cash to close calculator does that arithmetic with numbers you type. It does not replace the form.

The rate and the APR are different numbers

The interest rate is the note rate. It is what the monthly principal and interest is calculated from. The annual percentage rate, on page 3, folds in certain fees so loans with different upfront charges can be compared. A loan with a lower rate and higher points can have a higher APR. Use the note rate to compute the payment. Use the APR, and the itemized costs, to compare offers. The CFPB’s question-and-answer on rate versus APR is the short official version of that distinction.

Page 2: where each dollar sits

Page 2 splits costs into loan costs and other costs. Loan costs are origination charges, including discount points, and services you can or cannot shop for: appraisal, credit report, title, and similar fees. Other costs are taxes and government fees, prepaids, the initial escrow deposit, and items such as owner’s title insurance when it is charged.

A point is one percent of the loan amount, paid at closing, usually in exchange for a lower note rate. A lender credit is money the lender gives you at closing, often in exchange for a higher rate. Both change cash to close. Neither is the interest you will pay every month. The points break-even calculator asks how long the lower payment takes to earn the points back. That question is not printed on the Loan Estimate. The form gives you the inputs.

Some charges can change by any amount, and some can rise by only a limited percent, between the Loan Estimate and the Closing Disclosure. The CFPB’s Loan Estimate guide describes those tolerance categories. If a line moves by more than its tolerance, the rule for that category is what matters, not a calculator.

Page 3: comparisons

Page 3 restates the APR, the total interest percentage, and what you will have paid in five years: principal, interest, and mortgage insurance, and how much of that paid the balance down. It also lists whether the lender intends to service the loan, whether the loan has an assumption feature, and, for an adjustable-rate loan, where the later adjustments are explained.

Two Loan Estimates are comparable when the loan amount, term, and product type match. A 15-year loan and a 30-year loan will show different payments and different five-year totals even at the same rate. The loan comparison calculator holds two offers next to each other over the years you expect to keep the loan. It uses the note rate and the upfront costs, which is the comparison the APR is also trying to summarize.

Worked example

These figures are typed into the cash-to-close calculator so the two boxes on page 1 can be told apart. They are not taken from a real Loan Estimate. A $400,000 price, $40,000 down, a 6.5% note rate, $1,295 in lender fees, 0.5 points, $2,450 in third-party services, and $700 in recording and transfer charges. Insurance is $1,600 a year, tax is $4,800 a year, 15 days of prepaid interest, 3 months of escrow, a $2,000 seller credit, and $5,000 already paid as earnest money.

Loan amount: $400,000 − $40,000 = $360,000. Points cost $1,800.00.
Closing costs on this worksheet (lender fees, points, third-party services, and government fees) are $6,245.00.
Prepaids are $2,561.64, including $961.64 of per-diem interest. Escrow at closing is $1,600.00.
Costs beyond the down payment: $10,406.64. Cash to close subtracts the $2,000 seller credit and the $5,000 earnest money, then adds the down payment: $43,406.64.

The closing-cost total and the cash-to-close total are different numbers on purpose. Quoting only one of them answers a different question.

A second offer on the same $360,000 loan: 6.5% with no points, or 6.25% with 1 point. Fees of $1,295 sit on both. Over a 7-year horizon the comparison calculator finds the payment on the no-points loan is $2,275.44 and the payment on the points loan is $2,216.58. The points loan costs $3,600 more at closing. Which one costs less depends on how long the loan is kept. That is the comparison page 3’s APR is pointing at, done with the payment and the cash instead of a single percentage.

What to do with the form

Check that the rate you were quoted is the note rate in the loan terms, not only the APR. Check whether mortgage insurance is in the projected payment. Check that the cash-to-close box includes your down payment and credits for deposits you have already made. Then compare a second lender’s form on the same loan amount and term. The form is an estimate until the Closing Disclosure. Numbers you type into a calculator on this site are only as good as the lines you copied.