How to Read a Loan Estimate

After you give a lender six pieces of information — your name, income, Social Security number, the property address, an estimated property value, and the loan amount you want — that counts as an application, and the lender has three business days to send you a Loan Estimate.

It is three pages, standardized by federal rule. Every lender fills in the same boxes in the same order. That is the whole point: two Loan Estimates can be laid side by side and compared line for line, which is impossible with the informal “quotes” lenders send by email.

Two things it is not. It is not an approval — underwriting still has to happen. And unless the form explicitly says the rate is locked, the interest rate on it can move before closing.

Every figure below comes from one scenario, so you can follow a single purchase from the top of page 1 to the cash you wire at closing.

The first block answers “what am I actually agreeing to?” Five rows matter:

• Loan Amount — what you are borrowing, $320,000 here. Not the price of the house.
• Interest Rate — 6.5% in this example. Check the “Can this amount increase after closing?” column beside it. On a fixed-rate loan every answer in that column should be NO.
• Monthly Principal & Interest — $2,022.62. This is the loan repayment only, and it is the number most people mistake for “the payment.”
• Prepayment Penalty — whether paying the loan off early costs you extra.
• Balloon Payment — whether a large lump sum comes due at the end.

This is where the payment stops being $2,022.62. The Projected Payments table adds Estimated Taxes, Insurance & Assessments and produces an Estimated Total Monthly Payment.

The taxes and insurance add $883.33 a month — 44% on top of principal and interest. A buyer who budgeted around the $2,022.62 figure is off by nearly $900 every month.

One thing the Loan Estimate does not show: HOA dues. They are not a loan cost, so they never appear on this form even though you have to pay them. At $100 a month, the true cost of owning this house is $3,005.95, not the $2,905.95 the form projects.

Two summary numbers: Estimated Closing Costs and Estimated Cash to Close. Page 2 breaks both of them apart, and the split matters, because the two are not the same thing.

Page 2 splits costs into Loan Costs and Other Costs, lettered A through J. The letters are worth learning, because they tell you which numbers you can negotiate and which you cannot.

• A. Origination Charges — the lender’s own fees, including any discount points. This is the block most directly under the lender’s control, and the first place to compare offers.
• B. Services You Cannot Shop For — appraisal, credit report, flood determination. The lender picks the provider.
• C. Services You Can Shop For — title services, settlement, survey. You may be able to use a cheaper provider, and the form comes with a written list of options.
• E. Taxes and Other Government Fees — recording fees and transfer taxes. Set by government, not the lender.
• F. Prepaids — the first year of homeowners insurance, prepaid interest from closing to month end, and any property taxes due. These are not fees. You are paying your own costs early.
• G. Initial Escrow Payment at Closing — several months of taxes and insurance deposited to start the escrow account. Also not a fee, and also real money you must bring.

The distinction between fees (A through E) and your own prepaid costs (F and G) is the one buyers miss most often. A lender with lower fees can still show a higher cash-to-close if the closing date lands where more prepaid interest is due.

Page 3 exists purely to make offers comparable, and it contains the two figures that expose an expensive loan hiding behind an attractive rate.

• In 5 Years — total you will have paid in payments and costs after five years, plus how much principal you will have paid off.
• Annual Percentage Rate (APR) — the interest rate with certain lender costs folded in. It is normally higher than the note rate. A loan with a low rate but a big gap between rate and APR is buying that rate with fees.
• Total Interest Percentage (TIP) — total interest paid over the loan term as a percentage of the amount borrowed.

Signing page 3 confirms you received the form. It does not accept the loan.

Read them in this order, and the differences surface quickly:

1. Confirm both are for the same loan amount, term, and product. A comparison between a 30-year and a 25-year loan is not a comparison.
2. Compare box A, Origination Charges. This is the lender competing.
3. Compare interest rate and APR together. A wide spread means costs are buying the rate.
4. Compare box J, Total Closing Costs — then check whether the difference is in fees or in prepaids and escrow, which depend on your closing date and are not the lender being cheaper.
5. Compare the In 5 Years figures on page 3.
6. Ask each lender to quote on the same day. Rates move, and Tuesday versus Thursday is not a fair test.

Later, the Closing Disclosure arrives at least three business days before closing with the final numbers. Put it beside the Loan Estimate and check each line — that comparison is exactly what the two matching forms are designed for.

The Projected Payments box is the number to plan around, plus HOA dues if the property has them. Enter the same figures in the home payment calculator to see how the total moves when the tax rate, insurance premium, or down payment changes, and read cash needed to close before you assume the down payment is the whole upfront cost.