Key Takeaways
- The fees that matter most are in Section A – Origination Charges on page 2 of the Loan Estimate
- A lender offering a low rate but charging heavy origination fees may actually cost you more than a lender with a slightly higher rate and no fees
- Discount points are a legitimate way to buy down your rate, but they should be clearly disclosed — not hidden
- Always compare Loan Estimates side-by-side across multiple lenders before choosing who to work with
- If something looks off or you’re unsure what a fee means, ask your loan officer to explain it line by line
Understanding Page 1 – Loan Terms and Projected Payments
Okay, let’s take a look at how to read a loan estimate. So, we’re gonna start with the top of page one, go over a few things, work our way down, go over everything to make sure you understand it.
So, first thing you’re gonna have the date the loan estimate was issued. Your name will be here for customer information. Property address is going to be on this line right here. If you’re doing a purchase, the purchase price will be right here. If you’re doing a refinance this will be the estimated appraised value.
Your loan term is going to be right here. So how many years the loan term is for. “Purpose” is going to be whether it’s a purchase or a refinance product. That’s going to be whether it’s a fixed rate or adjustable rate.
And then loan type will be whether you’re conventional, FHA, VA. And then rate lock is going to show whether your rate is locked in or not and then how long that rate lock is good for.
So, basically when your rate lock that your interest rate’s locked in at expires. Loan amount is going to be right here. This section will tell you if this amount can change after closing or not.
Interest rate right here. This is just for educational purposes so we don’t have the rate in there, but this is where you’d see where your rate is at.
This section tells you whether the rate can increase after closing or not. Monthly principal and interest payment, that is going to be what’s being paid to pay off your mortgage.
Prepayment penalty. This will tell you whether or not there’s a prepayment penalty. Prepayment penalties are when you pay off the loan within a certain amount of time, you get charged a penalty for paying it off early.
Balloon payment. This will tell you whether or not there’s a balloon payment. Balloon payments are just a large lump sum that’s due at a specific time frame and that’ll tell you whether it’s on there or not.
Analyzing Your Estimated Total Monthly Payment and Escrow
Scrolling down a little bit more you’re going to see your projected payments section. This section will have the principal and interest from above. Also, if you have private mortgage insurance on the loan then you’ll see that right there.
And then you’re going to see your estimated escrow which is going to typically consist of your property taxes and your homeowners insurance. So all that added together will give you your estimated total monthly payment, which is essentially the payment that you’re going to be right in the checkout for to pay your mortgage.
On the right hand side it’s got years 12 through 30. The only thing different on this one is this is an FHA loan. They’re putting more than five percent down so this private mortgage insurance right here will actually fall off after year 11. So it just shows the payment without that on there. So if the borrower happens to stay in the house for 12 years then this is what the payment will adjust down to.
The section below this, this can confuse a lot of people which is why I made this video to go over it.
Estimated taxes, insurance and assessments. So a lot of people will think this amount right here gets added to the estimated total monthly payment and then they freak out to get their payments a lot higher than what they were expecting.
So this section right here just includes the property taxes and the homeowners insurance that are quoted in this 298 up here, but then what it also adds into it is HOA dues if there is a property with an HOA.
HOA is always paid separately, so it’s not going to be part of this payment up here that you’re cutting to check out for. You pay that on your own. So this 379 right here essentially covers the property taxes, the insurance, and if there is an HOA.
So, at the end of the day the amount that you’re going to write as a check to pay your mortgage is going to be right here in this estimated total monthly payments.
This right here is just going to include HOA if it has HOA also which you pay check for separately. Right below that you’re gonna have your estimated closing cost which is broken down on the next page. And then below that is gonna be your estimated cash to close.
Now, your cash to close is going to, if it’s a purchase, it’s gonna show basically estimated down payment plus the closing cost, what you’re bringing to the table.
Keep in mind this is just a loan estimate. A lot of the numbers are inaccurate up front. Those all get adjusted as we get closer to closing. This is just to give you a rough idea of what you’re bringing to the table.
If you’re doing a refinance there might be a minus sign next to this “cash close.” So if you’re doing a cash out refinance, it’ll be negative and then a number and that’s the amount of cash back you’re getting. If you’re not doing a cash out refinancing, you’re just doing a standard refinance, a lot of times we try to make the loan amount to where you’re not bringing anything to the table. In order to do that we make the loan amount a little more than what it needs to be so once again it’ll show cash to close but it’ll have a negative sign next to it, meaning you’re not bringing anything to the table. You’re getting that back.
Page 2 Breakdown – Closing Cost Details and Origination Charges
Next section, we’re gonna go down to is page two which breaks down the closing cost line by line.It’s gonna have it broken down into different sections and we’ll go over all this. So, section A is gonna be origination charges. This is just gonna be if there’s any discount points to buy down the rate that you picked.
So in this case here they paid about $1,200 in discount points to get the rate a little bit lower. Essentially if we’re doing discount points, we’re just looking at what’s the rate without discount points, what is the rate with discount points, how much are you saving on that payment, and then what does it take you to recoup this $1,200 or whatever that dollar amount will be.
So in most cases, I’m only plugging in discount points if there’s a shorter recoup time and it makes sense to do it.
Section B. Services you can’t shop for. So if you have an appraisal on the loan, there’s gonna be the appraisal fee in there. You’re gonna see the credit report fee.
Upfront mortgage insurance premium. This is specific to FHA. So if you’re doing an FHA loan you’re gonna see that in there. If you’re doing a VA loan you might see the funding fee in there.
If you’re doing conventional loan, you’re not gonna see that at all. So the upfront mortgage insurance premium, it’s just a charge that FHA charges to do an FHA loan. Same thing with the funding fee for VA. If you’re doing a VA loan, you’re not exempt from the funding fee. It’s just a charge that VA charges to do the VA loan.
Section C. Services you can shop for. This is basically just going to be your title fees. So you’re going to see all the title fees in here. If you’re doing a purchase, the title company was picked in the purchase contract, so it’s these fees are typically estimated up front. We’ll get the fees from the title company up and update those later.
The refinances, we typically have title companies that we work with, so their fees will be plugged into here. But essentially this is just the fees for the title doing their portion of the loan.
Going back up to here we’re going to have section E, which section E is going to be taxes and other government fees. Typically what you’re seeing in here is the recording fee. So that’s the fee to record the deed with the county. So if you’re doing a purchase, once you purchase the house, the title has to record the deed to make you the official homeowner. If you’re doing a refinance the title has to record a deed. You’re already the official homeowner but the title’s recording a new deed with the new terms on there. That’s the cost to do that.
Calculating Prepaids, Initial Escrow, and Other Government Fees
Section F is your prepaids. So what you’ll see on here if you’re doing a purchase, your homeowner’s insurance premium is paid a full year in advance. So this will be the estimated amount right there. You’ll end up shopping for your own insurance and then whatever sort of premium you’ll get, that number will be adjusted there but we just got to plug something in for the purpose up front.
Prepaid interest. So what prepaid interest is, is when your loan closes, so for example, if your loan closes in the middle of March, then your first payment is to May 1st. So your payment’s typically due the first of the following month of when you close.
So if your payment’s due on May 1st, then the May 1st payment covers the interest from April. But if you closed your loan in March then we got to collect the interest from March since your payment will never cover that. So that’s what you’re going to see right there if you have prepaid interest.
Section G is initial escrow payment at closing. So if you have a mortgage that includes escrow, which is taxes and insurance, then you’re going to see us collecting a couple months for taxes, a couple months for insurance, and that’s going to be the charge there.
So on purchases it’s typically a couple months each on refinances. It really depends on the time of year you close because if your homeowner’s insurance is due the month after we close, then obviously we’re going to have to collect a lot more than if you just paid your homeowners insurance right before we started the refinance.
Same thing with taxes. If taxes are coming due we’re going to collect more than if taxes were just paid or paid a few months ago. So this number can vary just depending on where it’s at in the process and when it’s done.
Section H is other fees. So this can include a lot of different things. I mean you can see home warranties in there; you can see hoa fees in here. On a purchase you’re going to see something called title owners title insurance. Says optional. If this is a loan for the state of Arizona it’s not optional, but it is paid for by the seller. So this is just another title fee that’s included. The fee for it is right there.
Calculating Your Estimated Cash to Close – What to Bring to the Table
Any other fees is just other fees that didn’t fit into any of the other categories. If you scroll down to the bottom right it’s going to break all of this down for you. So what you’ll see here is the total amount of closing costs which is everything in section A through H. You’ll see your total closing cost. You’ll see the down payment that you’re required to bring if you’re doing a refinance. Obviously you won’t see that in there.
Deposit. That’ll typically be if we entered the earnest deposit in upfront. Typically I don’t enter the earnest deposit on front because we got to get the documentation that cleared your account, get it from title, so you might not see that in there.
Seller credits. That’s going to be if there’s any sort of seller credit. So if you have seller concessions that might pop up in there. The reason this one is showing 1,051 is because this is a seller credit which covers this fee up here. As I said, in the state of Arizona owner’s title insurance is covered by the seller in most cases. So we’ll typically see a credit for that down there.
Adjustments or other credits. So if there’s any other credits that we need to be put in there. The only other credit you’ll see right here we got lender credits. So in this case here they bought down their interest rate but sometimes the interest rates that we pick come with the lender credit. So if you have a lender credit that will be right there and that’ll actually get deducted from your closing costs.
And then we get your estimated cash to close right here. So like I said just shows you what you’re expected to bring to the table or in the case of a refinance what you might be getting back.
Keep in mind this is a loan estimate. The numbers aren’t always spot on accurate. It’s just more to give you a rough idea of what you’re looking at. So a lot of these numbers can change throughout the process. As we start to finalize, as you get your insurance quotes, all that. So this is more just to give you a rough idea of what you’re looking at.
Page 3 – Comparing APR, TIP, and Other Loan Considerations
That is it for page two. The last page on here is just gonna be page three. What you’re gonna see on here is the name of the lender we’re brokering it out to. You’re going to see my information for Arnaiz Mortgage right there.
The comparisons. What you’re going to see in here is basically comparison of five years. So in five years this is the total amount that you’d pay for principal, interest, mortgage insurance, and loan cost. So basically just saying you make five years worth of payments, this is the total dollar amount that you’ll end up paying.
Principal you have paid off. So what this is showing is in five years out of this $140,000 right here, this is how much of it actually went to paying off the principal.
Annual percentage rate. A lot of people get confused with this. They see this, they think it’s the interest rate that’s based on their payment. This is not the interest rate that you’re locked into that your payment is based off of; this is actually just your cost of the loan expressed as a rate. So basically the closing cost that we just went over this is it expressed as a rate. So it has nothing to do with your payment, has nothing to do with the actual interest rate you’re locked in at, it’s just something to show your closing cost percentage
Total interest percentage. So in this case here we got a 30 year mortgage. So what this is saying is if this borrower paid the 30 years worth of payments and paid the loan off completely by the time they were done with that 56 percent of the payments would have went to interest. I find this section of it kind of silly because at the end of the day we’re not really seeing people pay 30 years worth of their mortgage. I mean a lot of people are flipping you know seven to 10 years. So this right here would just be if you actually stay in your house for a full 30 years, make all 30 payments, that is how much of it will go to the interest.
FAQs on Mortgage Servicing and Loan Assumptions
Final bottom section of this, we have the other considerations. So appraisal, just letting you know that we may or may not need to order an appraisal. Loan assumption. This is just letting you know whether the loan is assumable or not. So basically what an assumable loan is is somebody else can actually take over the loan under the same terms in the same loan amount. Everything the same is how you have it set up. So you keep the house for 10 years, 10 years down the road maybe you have family member, somebody you want to give the property to, interest rates better with what you’re locked into, you like how the loan terms are set up, they can assume the property and basically take that over rather than buying it from you.
If it’s not assumable then that just basically means in order to get rid of the house you’re gonna have to sell it, you know, get somebody to take it out of your name.
Homeowners insurance, just letting you know it requires homeowners insurance on your property. Late payment just goes over the late payment details. So after 15 days they’re gonna charge you a late fee.
Refinance just lets you know that you know if rates go down, values go up, basically it makes sense for you to do, you could potentially refinance it down the road.
Servicing: it lets you know whether they intend to service or transfer your loan. So in this case here it shows that they intend to service the loan. Keep in mind though with every single mortgage, servicing transfers do happen. So it doesn’t mean you’re guaranteed to be serviced by the same person for the amount of time that you keep the loan. They can always transfer it to somebody else. So this is just saying at the initial start of your loan they will be servicing it. If it was marked to transfer then that means as soon as they close the loan they’re going to transfer the servicing over to somebody else. But like I said, with any mortgage that you have, there’s always going to be servicing transfers. It may not happen. It may happen, you know, three, four, five years down the road. It may happen right away. But it is possible for it to happen on every single loan.
So that goes over all three pages of the loan estimate. Hope this helps you understand it. If you have any questions you can reach out to me, but this is more just to break everything down line by line so that way you understand it. Let me know if you need anything from me. Thanks.
