The mortgage Loan Estimate, decoded page by page

Apply for a mortgage and, within three business days, the lender must send you a Loan Estimate. It is three pages long, and every lender uses the identical form. This lesson walks each page with one sample loan, so the numbers on your own estimate have somewhere to land.

The simple version

The Loan Estimate is a federal form, required by the TILA-RESPA Integrated Disclosure rule that the Consumer Financial Protection Bureau enforces. Page 1 is the loan in summary: rate, payment, and cash needed. Page 2 itemizes the closing costs. Page 3 gives comparison numbers and the fine print. Because the layout is required, you can set two lenders' estimates next to each other and compare them line by line.

The sample loan

One example runs through the whole lesson: a $400,000 home, 20% down ($80,000), a $320,000 loan, 30-year fixed at 6.5%. The rate and the costs are illustrative, not a quote.

Page 1: the loan at a glance

• Loan terms: the loan amount ($320,000), the interest rate (6.5%), and the monthly principal and interest ($2,022.62). Next to each is a yes or no: can this amount increase after closing? On a fixed-rate loan, all three should say no. This section also flags any prepayment penalty or balloon payment.
• Projected payments: principal and interest, plus mortgage insurance if there is any, plus estimated escrow for property taxes and homeowners insurance. In the sample, escrow is about $650 a month, so the estimated total payment is $2,672.62.
• Costs at closing: estimated closing costs and estimated cash to close, the two numbers most buyers remember.
• At the top: whether your rate is locked and until when, and the date your other estimated closing costs expire. A rate that is not locked can still change.

Page 2: closing costs, A through J

Page 2 sorts every closing cost into lettered sections. The letters matter, because they tell you who sets the price and whether it can rise later.

Under the sections, the Calculating Cash to Close table adds the down payment and subtracts your deposit. In the sample: $10,969.79 in closing costs, plus the $80,000 down payment, minus a $5,000 earnest money deposit, comes to about $85,970 due at closing.

Which costs can change before closing

This is the part most buyers never hear about. The Consumer Financial Protection Bureau sorts closing costs into three groups.

• Cannot increase: fees paid to the lender, a mortgage broker, or an affiliate of either for a required service, and transfer taxes.
• Can increase by up to 10% in total: recording fees, and required services when you pick a provider from the lender's written list.
• Can change by any amount: prepaid interest, homeowners insurance premiums, initial escrow deposits, and third-party services the lender does not require.

There is a real exception. If something material changes, such as a different loan type, a different down payment, a low appraisal, or income that cannot be documented, the lender can issue a revised estimate. Then, at least three business days before closing, you receive the Closing Disclosure. That is the moment to compare it with your latest Loan Estimate, line by line.

Page 3: the comparison numbers

• In 5 years: what you will have paid in principal, interest, mortgage insurance, and loan costs over the first five years, and how much principal you paid off. Sample: $127,572 paid, $20,445 of principal paid off. Most of the early years go to interest.
• APR: the yearly cost of the loan including certain fees, not just the rate. Sample: about 6.62%, versus the 6.5% rate, because the origination charge and prepaid interest are folded in.
• Total Interest Percentage (TIP): the total interest over the full term as a percent of the loan amount. Sample: about 127.5%. Keep the loan all 30 years and you would pay about $408,142 in interest on a $320,000 loan.
• Other considerations: whether the lender plans to service the loan, late payment terms, and other fine print.

The Real Cost lens

Small differences on page 1 turn into large ones over 30 years. On the sample loan, a rate one quarter point higher (6.75% instead of 6.5%) raises the monthly payment by about $52.90. Over the full 30 years, that is about $19,043. Two Loan Estimates that look almost the same can be nearly twenty thousand dollars apart once you multiply by 360 payments.

That is the reason the form is standardized. Side by side, the rate, section A (the lender's own charges), and the APR show where two offers actually differ. The mortgage calculator runs the payments for any rate you are comparing.

Common mistakes

• Comparing only the interest rate. A lower rate with higher origination charges or points can cost more if you sell or refinance early. Section A and the APR belong in the comparison.
• Treating the estimate as final. Some categories can still change, and the Closing Disclosure is the version that counts.
• Assuming the rate is locked. The top of page 1 says whether it is, and until when.
• Skipping section C. You may be able to shop for those services, and the lender's estimate is not the only price.
• Comparing a 30-year estimate with a 15-year estimate as if they were the same product.

Advanced insight

Discount points are interest paid up front. Paying them lowers the rate, and they appear in section A. Whether they pay off depends on how long the loan lasts: divide the cost of the points by the monthly savings to find the break-even month. Keep the loan past that month and the points come out ahead. Sell or refinance before it and they cost money.

What this lesson is NOT

This is not a rate quote, a recommendation of any lender or loan, or advice on whether to buy a home. Closing costs vary widely by state and lender, and the sample figures here are illustrative. Your own Loan Estimate and Closing Disclosure are the documents that govern your loan. This lesson is how to read them. The decision is yours.

Related on this site

• Lessons: Mortgages 101, FHA vs Conventional, and Buying vs. renting.
• Glossary: Loan Estimate, APR, Escrow, and Closing costs.
• Tool: Mortgage calculator.