Understanding the Loan Estimate: How to Read It and Spot Red Flags

When you’re shopping for a mortgage, the Loan Estimate (LE) is your key to understanding the true cost of your loan. Introduced in 2015 as part of the Consumer Financial Protection Bureau’s (CFPB) "Know Before You Owe" initiative, this three-page document provides a detailed breakdown of your loan terms, closing costs, and monthly payments. Here’s a guide to reading it—and some tips for spotting potential pitfalls.

Breaking Down the Loan Estimate

1. Loan Terms
   The first section shows your loan amount, interest rate, and monthly principal and interest payment. It will also indicate whether your loan has features like a prepayment penalty or balloon payment. Ensure these terms match what you’ve discussed with your lender.

2. Projected Payments
   This section estimates your total monthly payment, including taxes and insurance. Pay close attention to the Estimated Taxes, Insurance, and Assessments line—it’s common for lenders to underestimate this amount, which could lead to higher-than-expected payments after closing.

3. Closing Costs
   Page two provides a detailed breakdown of costs, including lender fees, points, and third-party services. Look for high origination fees or charges that seem out of line with other estimates.

4. Comparisons
   Page three includes a “Comparisons” section, which helps you evaluate the total cost of the loan over five years, as well as the annual percentage rate (APR) and total interest percentage (TIP).

Tips for Spotting Red Flags

• Underestimated Taxes and Insurance
  Lenders sometimes lowball these figures to make your monthly payment appear smaller. Research typical costs for your area or consult with a mortgage coach to verify accuracy.

• Points for a High Rate
  Discount points are often used to lower your interest rate, but some lenders sneak in points without offering a corresponding rate benefit. If you're paying points, confirm the trade-off makes sense.

• Too-Good-to-Be-True Rates
  If a quoted rate is significantly lower than others, proceed with caution. This could indicate a bait-and-switch tactic where the terms change later in the process.

• Excessive Fees
  Compare the Loan Costs section across multiple estimates. Unusually high fees could signal a lender trying to pad their profits.

Pro Tip: Compare Apples to Apples

When comparing Loan Estimates, ensure all assumptions (loan type, down payment, loan term, etc.) are identical. This allows you to make a fair comparison between lenders.

The Loan Estimate is a powerful tool, but understanding it requires careful review. If you're feeling overwhelmed, consider working with a mortgage coach who can help you navigate the process and avoid costly mistakes. YourMortgage.Sucks is here to ensure you’re informed and empowered to secure the best possible loan for your situation.