What's a loan estimate?

A loan estimate is a three-page document that helps you see the most important details about a mortgage lender's offer. It outlines the most important details of your loan, including the loan amount, interest rate, monthly payment and closing costs. 

Every loan estimate you get, regardless of the lender, will look the same. This is required by law and makes it much easier to compare multiple offers side by side. You'll get your loan estimate within three days of your application. The estimate is valid and binding for 10 days after you receive it. While a loan estimate is not a commitment to fund your loan and doesn't guarantee your rate or other factors, it does show what the lender expects to offer you if you decide to proceed.

Know the lingo

Even if this isn't your first time getting a mortgage, you may come across some terms you're unfamiliar with. We've defined the most common and important terms for you, so you can focus on the info rather than the wording.

• Escrow - This is an account that your mortgage lender will use to hold onto your homeowners' insurance and property tax payments. That way, your lender will pay them for you so you don't have to worry about them every month. Your monthly mortgage payments typically include the principal and interest on the loan, as well as insurance and taxes. Then, your lender holds onto them in escrow until they're due. You can choose to waive escrow if you'd rather handle your taxes and insurance yourself.

• Prepaids - Your closing costs may include prepaid interest (the amount of interest you'll owe between the date you close and your first mortgage payment), insurance premiums and property taxes. If you prepay, your insurance and taxes will be put into escrow until they need to be paid.

• Points - You can effectively buy a lower interest rate on your loan (and therefore pay less over time) by paying some money upfront in the form of points. Each point typically costs 1 percent of the loan amount and reduces the interest rate by about 0.25 percent. So, if you have a 200,000 loan with a 4% rate, you could pay $2,000 at closing to reduce your rate to 3.75%, which will end up saving you some money in the long run.

• Assumption - “Assumption” refers to the ability for someone else to take over the mortgage. If you decide to sell or transfer the property to someone else, some lenders allow that person to assume your loan instead of requiring them to get a new one.

• Servicing - Many lenders that offer mortgages don't end up servicing those accounts after the loan has closed. Instead, they'll sell or transfer the loan to a mortgage servicer that will collect your payments and answer any questions you may have. 

These are some of the most common terms, but if you see anything on your estimate that you're unsure of, ask your loan officer to clarify.

Are loan estimates accurate?

When using loan estimates to compare offers, it's important to remember that they're not a guarantee of funding, but rather a  snapshot of what the lender expects to offer if you move forward with the loan. Most numbers, including origination charges, usually stay the same from your estimate to your final loan, but some other expenses like closing costs may be updated before you close.

Another important thing to note is that your interest rate might not necessarily be what you get, unless you locked in the rate with your lender. Since rates change all the time, locking in may be a good call.

As with everything else in your loan, don't hesitate to ask your loan officer for guidance or explanation. They're here to help you! Click here to start your application today!