The Loan Estimate Form Turns Oranges Into Apples
Shopping for a house can be stressful, but choosing a loan has the potential to be just as bad. Thereās a lot to know, a small window in which to figure it all out and a 30-year commitment to a loan product that might just not be right for you to worry about. All in all, it might be easier to remove your own inflamed appendix than to pick a mortgage.
The Loan Estimate Form and You
If youāve already been to see one or more mortgage bankers or brokers and received a Loan Estimate form that explains your loan options, grab those now. If not, you can follow along withĀ this dummied up copyĀ provided by the Consumer Financial Protection Bureau. This is definitely a blog that needs some real-life props.
There are a lot of things to see on this form, but itās a million times easier than the form that was its predecessor. The goal with the new Loan Estimate form was to make it more accessible for more people and, hopefully, easier to compare apples to apples. Letās see whatās in your orchard.
The Big Question: Whatās This Loan Cost?
One of the most important variables for many buyers is the monthly cost of their home loan. After all, the monthly payment is immediate and pressing. If you canāt make it, you have nowhere to live and bad things happen. Check out these items to figure your immediate costs:
Monthly Principal and Interest.Ā You can find information on your monthly payment on the front page of the Loan Estimate form. Under the āLoan Termsā section, youāll find the āMonthly Principal and Interestā line. Thatās the base payment for your loan ā and if thereās a big, fat āNoā next to it, this is always going to be the base payment for your loan, until you sell, refinance or pay it off.
Balloon Payment.Ā Two lines down is the āBalloon Paymentā option. You want this to say āNoā unless you have a plan to pay the loan off before the balloon hits. A balloon payment is an amount of money you still owe on the loan when the term is up. So, if you have a loan that has payments calculated like itās a 30-year loan, but the balloon is expected in five, you essentially have to pay 25 years worth of payments all at once when that five-year term is up.
Projected Payments.Ā Pop on down to the section called āProjected Payments.ā This section breaks your payment down into more parts. Not only is your base payment included, youāll see a line for mortgage insurance and escrowed items (usually this includes taxes and homeownerās insurance). If thereās a planned change in your loan payment, like the removal of mortgage insurance, your āProjected Paymentsā section will have more than one column for payment information. Youāll read this left to right to see how your payment changes over time.
Estimated Taxes, Insurance, and Assessments.Ā The escrowed items are detailed in this section. Normally, thatās one monthās worth of taxes, homeownerās insurance, and HOA fees.
Cash to Close.Ā Youāll probably have to bring some money to closing. Youāll find out just how much on the very last line of page one. You can find the details on this figure on page two, but weāre going to skip that for now.
Comparing Your Tree Fruit
On page three, youāll find one last set of very important numbers for comparing your loan offers. Itās even labeled āComparisons.ā This section will help you understand the long-term differences over the loans that youāre considering. If loan one will cost you $50k over the first five years and loan two costs $60k in the same time period, itās clear that in the long run, the first loan will do you better. But letās say youāre not as interested in the long run as you are in the now.
Right now, you have a small down payment and youāre trying hard to hold on to as much cash as possible for emergencies. Back on the page, one might be the better place to look for your answers. Itās possible that the loan thatās cheaper, in the long run, costs a great deal more in cash to close. In that case, you may want to take the more expensive long-term loan and plan to refinance after a few years.
While youāre on page one, go ahead and compare those payments. Do both estimate forms include mortgage insurance or escrows? If so, itās an easy side-by-side comparison. If not, youāll want to look at the principal and interest payment, and find out what the average taxes and insurance cost in your market so you can estimate how much extra to hold back each month so you can pay those yourself.
How āBout Them Fees?
The elusive page two includes details on your closing costs. This is everything from loan origination costs to prepaid items like your portion of the current yearās taxes. All of this stuff, when added together, end up on the last line in the right-hand column. Thatās your cash to close.
If youāve rolled any of those fees into your mortgage, youāll see those appear next to the line that says āClosing Costs Financedā¦ā Asking your mortgage professional for a couple of different Loan Estimate forms with and without fees added to your mortgage can help you decide whether it makes financial sense to pay for those items now or finance them over time.
Itās a pretty handy form, really.
Need to Find a Banker or Broker First?
Of course, none of this is meaningful unless you have some context to set it in. Thatās where your friendly neighborhood mortgage professional comes in. If you havenāt started shopping loans, I can help point you in the right direction. Simply click on the resources menu located at the top of the page.Ā There you will find my preferred service providers. Theyāre always happy to help.
I hope this information has been helpful and will be useful to you.Ā I look forward to visiting with you soon and do not hesitate to contact me if I can help you with any of your real estate needs.
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P.S.Ā If you are looking to sell your home, be sure and get my Special ReportĀ ā29 Essential Tips That Get Homes Sold Fast (And For Top Dollar)Ā byĀ CLICKING HERE.
P.P.S.Ā Ā If your listing has expired and did not sell, get my Special ReportĀ ā20 Questions You Absolutely Must Ask Your Next Agent Before You Sign On The Dotted Line (And Make The Same Mistake Twice)āĀ byĀ CLICKING HERE.
P.P.P.SĀ If you are looking to buy a home, you need to get my Special ReportĀ āHow To Avoid Paying Too Much (A Simple Guide To Help You Avoid Overpaying For Your Home.)Ā byĀ CLICKING HERE.