A Loan Estimate is one of the first important documents you’ll receive during the mortgage process. But with several pages of numbers, fees, and loan details, it can be a lot to take in. Let’s break down what you should actually look for and what those numbers mean.
What Is a Loan Estimate?
A Loan Estimate (LE) provides an early look at your loan terms, projected monthly payment, and estimated closing costs. It’s designed to help you understand the overall cost of your mortgage and compare different loan options.
Your Loan Estimate is provided early in the mortgage process, so keep in mind that some of the figures are estimates and may change as your loan progresses.
What Should You Look At First?
There’s a lot of information on a Loan Estimate, but you don’t need to understand every line at once. Start with the big picture:
- Loan amount
- Interest rate
- Loan term
- Estimated monthly payment
- Estimated closing costs
- Estimated cash to close
- Loan type
These are some of the key numbers to review when looking at your mortgage.
Your Loan Amount & Interest Rate
Your Loan Estimate will show how much you plan to borrow, and the interest rate associated with the loan.
If your rate has not been locked, the interest rate and some related costs can change as market conditions change. Once your rate is locked, your Loan Estimate may be updated to reflect the locked terms.
Your Estimated Monthly Payment
Your Loan Estimate breaks down your projected monthly mortgage payment, so you can see where your payment is going.
Depending on your loan and property, your payment may include:
Principal + Interest + Mortgage Insurance + Property Taxes + Homeowners Insurance
Not every borrower will have each of these components, so your individual payment will depend on your loan program and property.
Understanding Your Closing Costs
The Loan Estimate provides an early look at the costs associated with getting your mortgage and purchasing your home.
These may include:
- Lender fees
- Appraisal fees
- Credit report fees
- Title and settlement charges
- Recording fees
- Prepaid interest
- Homeowners insurance
- Initial escrow deposits
- Taxes and other applicable costs
Some fees are controlled by the lender, while others may come from third-party providers or government requirements.
Cash to Close vs. Down Payment
One of the most commonly misunderstood numbers on a Loan Estimate is cash to close.
Your down payment is the amount you’re contributing toward the purchase price of the home. Your cash to close can include your down payment plus other costs and adjustments, such as closing costs, prepaid expenses, credits, and your earnest money deposit.
That means your cash to close is not necessarily the same as your down payment.
Can the Numbers Change?
Yes! Your Loan Estimate is provided early in the mortgage process, so certain figures can change as more information becomes available.
For example, costs may change based on:
- Final property taxes
- Homeowners insurance
- Title and settlement charges
- Changes to your loan
- Changes to your interest rate
- Changes to your closing date
- Prepaid interest
- Escrow requirements
Your Closing Disclosure will provide the final terms and costs of your mortgage before closing.
What Happens After You Receive Your Loan Estimate?
Receiving your Loan Estimate is just one step in the mortgage process. As your loan moves forward, your lender will continue verifying your income, assets, credit, and property information.
Closer to closing, you’ll receive a Closing Disclosure, which provides the finalized terms, projected payment, closing costs, and cash to close.
The Bottom Line
Your Loan Estimate is an important tool for understanding the overall cost of your mortgage before you get to the closing table.
Don’t focus on just one number. Look at the interest rate, monthly payment, closing costs, and cash to close as a whole. And if something doesn’t make sense, ask questions!
We’re here to help you understand the numbers and feel confident throughout the process.