Selecting the Optimal Loan: A Guide to Comparing Loan Estimates
When you’ve determined your desired loan amount and type, meticulously evaluating Loan Estimates becomes crucial for identifying the most favorable offer among various lenders. Beyond the raw cost, your decision should encompass several vital aspects: the overall expense of the loan, your comfort level with the loan officer’s ability to address your inquiries, and your confidence in the lender’s capacity to adhere to your closing timeline. Possessing multiple Loan Estimates can significantly strengthen your position during negotiations.
Next Steps for Loan Comparison
To effectively weigh your options, meticulously compare the specifics outlined in each of your Loan Estimates. Our Loan Estimate Explainer can demystify each offer’s implications for your financial situation. Pay close attention to:
- The principal loan amount.
- The prevailing interest rate. Be aware that daily fluctuations in interest rates can account for discrepancies between Loan Estimates issued on different dates. For adjustable-rate mortgages (ARMs), scrutinize the worst-case scenario should interest rates escalate.
- The recurring monthly principal and interest payment.
- Any monthly mortgage insurance premium.
- The comprehensive monthly payment, encompassing principal, interest, mortgage insurance, and escrow for property taxes and homeowner’s insurance.
- The upfront loan expenses (detailed on page 2, Section D, “Total Loan Costs”), particularly the origination charges.
- Lender credits (found on page 2, under Section J, “Total Closing Costs”).
- The “cash to close” figure (located on page 2), which typically necessitates a cashier’s check or wire transfer at the time of closing.
Examining Upfront Lender Costs
When scrutinizing closing costs, direct your attention to fees that exhibit variability across lenders. These typically include the cumulative origination charges in Section A, the services listed in Section B, and lender credits detailed in Section J. Origination charges represent initial fees levied by your lender, while lender credits serve as reimbursements designed to offset your closing expenses.
Calculating Your Five-Year Borrowing Expense
On average, borrowers tend to retain a mortgage for approximately five years before relocating or refinancing. While your circumstances may differ, calculating the total monetary outlay in interest and fees over a five-year period offers an excellent method for comparing loan propositions.
Refer to page 3 of the Loan Estimate, specifically the “In 5 years” entry within the Comparisons section. The initial figure represents the total dollar amount (including principal) you will have disbursed over five years. The subsequent figure indicates the amount of principal you will have repaid after five years. Subtracting the second number from the first will reveal the total sum of interest and fees you will have paid after five years – this is your five-year cost of borrowing.
Note: For adjustable-rate mortgages (ARMs), bear in mind that the five-year cost projection assumes stable interest rates. If rates climb, your actual borrowing cost will be higher.
Confirming Your Loan Preference and Approach to Points/Credits
Should a lender present an offer different from your initial request, or if you desire to explore alternative options, it’s not too late. You can revisit each lender and request a Loan Estimate that more closely aligns with your ideal scenario.
Negotiate for the Most Advantageous Deal
Effective negotiation can result in significant savings. Your most potent negotiating tool is typically having Loan Estimates from competing lenders at hand. Lenders are often amenable to matching or surpassing their rivals’ offers. Furthermore, they can elucidate the reasons for any discrepancies in their estimates. If the lender you feel most comfortable with is quoting a higher price, don’t hesitate to ask them to match a more competitive offer you’ve found elsewhere. Negotiations are most effective when conducted within a brief timeframe after you have a signed purchase contract. If you consider switching lenders later, ensure direct communication with the new lender to confirm their ability to meet your closing deadline.
Key Insights
Your comparative analysis should concentrate on figures controllable by the lender.
If one Loan Estimate displays notably lower taxes and insurance, it doesn’t automatically signify a superior loan. Lenders do not dictate your taxes and insurance. This holds true for certain other costs as well. If the following expenses aren’t similar across estimates, inquire with your lender for an explanation:
- Escrow sums for property taxes and insurance (page 1)
- Taxes and other governmental fees (page 2, Section E)
- Prepaids (page 2, Section F)
- Initial escrow at closing (page 2, Section G)
Avoiding Common Pitfalls
“No closing costs” loans are not truly free.
Some lenders promote loans without closing costs, but the trade-off is often higher monthly payments. Gain a deeper understanding of how no-closing-cost loans function.
Remain vigilant for red flags.
If the content of a Loan Estimate deviates significantly from your discussions with your loan officer, exercise caution. Pose questions. It might simply be a misunderstanding, or it could signal that you should consider a different lender.
For more information on the facts and figures cited, please consult our sources page.
The procedures and forms described herein reflect mortgage regulations applicable to the majority of mortgages.