How to Compare Mortgage Loan Estimates Like a Pro

Getting a mortgage is one of the biggest financial decisions you’ll make. When shopping for a home loan, you’ll receive mortgage Loan Estimates from several lenders – but how do you compare them to find the best deal?

I’ve bought two homes and refinanced once so I’ve seen my fair share of Loan Estimates. In this article I’ll walk you through what to look for on a Loan Estimate, how to compare Loan Estimates from different lenders, and tips for choosing the best mortgage.

What is a Loan Estimate?

When you apply for a mortgage, the lender is required to provide you with a Loan Estimate within 3 business days. This document provides the key terms, projected monthly payments, and estimated closing costs for the mortgage

The Loan Estimate includes:

• Loan details like the interest rate, loan amount, and loan term
• Projected principal, interest, taxes and insurance (PITI)
• Closing costs like origination fees, appraisal fees, and title fees
• Cash needed to close
• Projected payments schedule

Reviewing and comparing Loan Estimates is crucial to choosing the best mortgage option. Even small differences in rates and fees can really add up over the life of a 30-year mortgage.

Step 1: Compare Interest Rates and Loan Terms

The first thing I look at when comparing Loan Estimates is the interest rate and loan term. These determine your monthly payments over the life of the mortgage.

Pay attention to:

• The type of rate – fixed or adjustable
• The loan term – often 30 years but can be 10, 15, 20 etc
• The base interest rate – stated as a percentage

A lower interest rate means lower monthly payments. Even a small difference of 0.25% in interest rates can add up to thousands in interest charges over the loan term.

It’s also key to compare the same loan term, such as 30-year fixed rate mortgages from multiple lenders. Comparing a 30-year and 15-year loan isn’t apples to apples.

Focus first on comparing Loan Estimates with the same rate type and term before considering other options.

Step 2: Review Projected Monthly Payments

Now look at the projected principal, interest, taxes and insurance (PITI). This is your total estimated monthly housing payment.

Review:

• Principal & interest – amount going to mortgage principal and interest
• Mortgage insurance – may be required for loans with less than 20% down
• Estimated escrow – property taxes and homeowners insurance

The PITI helps you determine if the monthly payments fit your budget. Calculate the PITI as a percentage of your gross monthly income to see if it’s affordable.

Many experts recommend keeping housing costs below 28% of gross income. Compare the PITI between Loan Estimates to find options that fit your budget.

Step 3: Understand Loan Costs

Next, closely review the loan costs and fees included in the Loan Estimates. These costs are paid at closing and impact the total amount you’ll need to bring to settlement.

Loan costs include:

• Origination charges – application fees, underwriting fees, etc.
• Discount points – you pay to buy down the interest rate
• Services you can’t shop for – appraisal, credit report fee

High origination fees can add thousands to your closing costs. On the other hand, points let you pay more upfront to reduce your interest rate.

Carefully compare these loan costs between lenders. Ask about eliminating or lowering any fees that seem excessive.

Step 4: Look at Estimated Closing Costs

In addition to loan costs, your Loan Estimate lists other estimated closing costs including:

• Title charges – title insurance, settlement fees
• Taxes – recording fees, transfer taxes
• Prepaids – home insurance premium, mortgage insurance premium, property taxes
• Initial escrow payment – reserves for taxes and insurance

The lender has some control over title and settlement services. Don’t be afraid to negotiate reduced title insurance rates and lower settlement charges. This can potentially save you hundreds.

Also pay attention to any listed owner’s title insurance policy. Most lenders will include this even if you already have a policy. Let them know so it can be removed.

Step 5: Check the Estimated Cash to Close

This is the estimated amount you’ll need to bring to closing after your down payment and closing costs. It includes:

• Down payment
• Closing costs
• Lender credits or prepaids from your Loan Estimate

Compare the estimated cash to close between Loan Estimates after factoring in your down payment amount. This gives you an idea of the out-of-pocket cash needed.

If you’re tight on cash, look for lenders offering credits towards closing costs or prepaid items. This reduces the amount you need to come up with.

Tips for Comparing Loan Estimates

Here are a few final tips when comparing mortgage Loan Estimates:

• Get at least 3 Loan Estimates from different lenders. More data points make it easier to spot the best deal.

• Compare Loan Estimates for the same loan amount, rate type, and term. It’s not apples-to-apples otherwise.

• Adjust adjustable rate Loan Estimates to reflect potential future increases. Fixed rates are easier to compare.

• Ask lenders to match or beat competitor Loan Estimates. They may be able to lower fees to win your business.

• Calculate the APR listed on Loan Estimates to accurately compare interest costs. APR reflects your rate plus loan fees.

• Review your Loan Estimate carefully even after choosing a lender. The final Closing Disclosure should match your Loan Estimate.

Final Thoughts

Comparing mortgage Loan Estimates takes a little work, but it can really pay off through thousands in savings over your loan. Use the steps above to compare interest rates, projected payments, loan costs, closing costs, and cash needed to close.

Crunch the numbers between Loan Estimates, negotiate lower fees, and ask lenders to compete for your business. Follow these tips to lock in the best possible mortgage rate and terms.