Answers · Loan Estimates

How to compare two Loan Estimates

First, what a Loan Estimate is

A Loan Estimate is the three-page form a lender must give you within three business days after you apply for a mortgage. Every lender uses the same form with the same boxes in the same places. That is on purpose: it was designed so you could put two of them side by side.

• Page 1 is the loan: the amount, the interest rate, the monthly payment, and the estimated closing costs.
• Page 2 is the costs, in lettered sections A through J.
• Page 3 is the comparison box: what you will have paid in five years, the APR, and the total interest percentage.

Step 1: make sure they match

• Same loan amount. A fee that is a percent of the loan looks different on $370,000 than on $380,000.
• Same loan type and term. A 30-year fixed against a 30-year fixed. A 15-year loan will always show a lower rate; that is not the lender being generous.
• Same day, or close to it. Rates move every day. If one estimate is a week older than the other, ask that lender for a fresh one before you decide.
• Same points. Points are a fee you pay up front to get a lower rate; one point is 1% of the loan amount. One estimate with points and one without is not a fair match. Points sit in Section A.

Step 2: compare the rate and Section A together

Section A is called "Origination Charges." It is the money the lender itself charges you for making the loan: the origination fee, underwriting, processing, and any points. This is where lenders differ the most, and it is the part the lender cannot raise at closing unless something about your loan changes.

The rest of page 2 is mostly the same whoever you pick. Sections B and C are outside services like the appraisal and title work (you are allowed to shop for the ones in C). Sections E through H are taxes, government fees, prepaid interest and the money set aside for your escrow account. Those depend on your home and your closing date, not on the lender. So the honest comparison is the rate plus Section A, not the big total at the bottom.

Step 3: read the "In 5 Years" box

On page 3, "In 5 Years" adds up everything you will have paid in five years: principal, interest, mortgage insurance and loan costs. It also shows how much of the loan you will have paid down. It is the one number that already blends the fees and the payments, so it is the best single tiebreaker. Lower is better, as long as Step 1 holds.

The worked example (illustrative)

Say two lenders both quote a $380,000, 30-year fixed loan on the same day. The figures are made up to show the math; yours will differ.

Lender 2 saves about $124 a month but costs $3,900 more up front. Divide the extra cost by the monthly savings and you get the break-even month: about 32 months. Keep the loan longer than that and Lender 2 wins. Sell or refinance sooner and Lender 1 wins. Over five years, Lender 2 pays about $7,440 less in payments against $3,900 more at the start, so it comes out roughly $3,500 ahead by year five.

Run your own numbers in the breakeven calculator.

What to ignore

• Section I and the big "Total Closing Costs" line. Most of it is taxes and your own money going into escrow, and it swings with each lender's guess at your closing date.
• The estimated total monthly payment. It includes taxes and insurance, which are the same whoever lends.
• Cash to close. Same reason: it depends on the prepaid and escrow estimates more than on the lender.

Two mistakes that cost real money

• Comparing a worksheet to a Loan Estimate. A "fee sheet" or a rate quote on a web page is not binding. Only the Loan Estimate holds the lender to its Section A numbers.
• Treating the quoted rate as locked. Page 1 has a box that says whether the rate is locked and until when. Until it says locked, it can move with the market.

Questions people ask

Do I have to apply with two lenders to get two Loan Estimates?

Yes. The form comes after an application, and an application means six things: your name, your income, your Social Security number, the property address, an estimate of the home's value and the loan amount you want. Credit scoring models count every mortgage credit check inside a 14 to 45 day window as one, so two applications in the same couple of weeks cost your score about the same as one. More in Does shopping rates hurt my credit?

Can the numbers on a Loan Estimate change before closing?

Some can. The lender's own charges in Section A cannot go up unless something about the loan changes, such as the amount or your credit. Fees for services you cannot shop for can rise by at most 10% in total. Taxes, prepaid interest and escrow deposits are estimates and can move either way.

Is the APR enough to compare two loans?

It is a fair one-number check, because the APR (annual percentage rate) folds most lender fees into the rate. But it assumes you keep the loan for all 30 years. If you expect to keep it five to seven years, the "In 5 Years" box is closer to the truth.

Figures are illustrative principal-and-interest math at the stated rates and terms; they exclude taxes, insurance, and PMI, and are not a loan offer, approval, commitment to lend, or Loan Estimate. Your actual rates and fees depend on qualification with lenders. comparemyloan does not negotiate with lenders, lock rates, or take loan applications.