How to Use the Loan Estimate for a Mortgage Refinance
- The Purpose of the Loan Estimate
- Mortgage Rate: This is the rate that lender charge you to borrow money until the loan is paid in full. The interest rate is on the top of page 1 of the Loan Estimate. The lower the interest rate, the better. In some cases a lender charges you a lower interest rate but higher closing costs so there may be a trade-off to consider. Additionally, different types of mortgages and loans with different lengths have different mortgage rates so make sure you are comparing the same loan program and term. For example, the initial mortgage rate for an adjustable rate mortgage is usually lower than the rate for a fixed rate mortgage. Additionally, a 30 year mortgage has a higher mortgage rate than a 15 year loan. Use the Loan Estimate to confirm the program and length for your mortgage to make sure that any comparison is meaningful.
- Closing Costs: Closing costs are the fees charged by the lender and numerous third parties to process and close your mortgage. The estimated closing costs figure is on the bottom of page 1 of the Loan Estimate. In general, the lower the closing costs, the better but in some cases the lender may charge or the borrower may elect to pay higher closing costs to receive a lower mortgage rate.
- Annual Percentage Rate (APR): In short, the APR represents what your interest rate would be if it included all upfront lender and closing costs so it is a way to use one figure to compare both the mortgage rate and closing costs for different loans. For example, if you have proposals from two lenders that are offering the same mortgage rate but one APR is higher than the other, then you know the lender with the higher APR is charging higher closing costs. The APR is on the top of page 3 of the Loan Estimate
- Use our MORTGAGE COMPARISON CALCULATOR to compare multiple mortgage proposals
- What Borrowers Should Know About the Loan Estimate
According to mortgage industry regulations, the lender must provide the borrower a Loan Estimate that outlines a good faith estimate of the key terms of the mortgage including interest rate, closing costs and mortgage features within three business days of the borrower submitting a loan application to the lender. In a refinancing, the Loan Estimate also indicates the cash-out the borrower receives or cash required from the borrower when the mortgage closes, including the pay-off of your existing mortgage or other debts.
The Loan Estimate is designed to increase transparency, make it easier to compare refinance proposals and enable borrowers to hold lenders accountable. Receiving a Loan Estimate does not obligate you to work with that lender. If a lender is unwilling to provide a Loan Estimate this is a warning sign and you should shop other lenders for your refinance.
The Loan Estimate is a powerful tool that borrowers can use to review and compare refinance proposals from multiple lenders and decide if they want to move forward with the mortgage process. The Loan Estimate is a standard document that is the same across all lenders. The figures may change as loan terms vary across lenders, but the form remains the same. This allows you to more easily compare proposals from various lenders. To make sure that you find the best refinance terms, you should review Loan Estimates from at least five lenders.
When you compare Loan Estimates, you should focus on three key items that most impact your upfront and long term mortgage costs:
Although it is not required by law, you should also ask lenders for a Lender Fees Worksheet, which provides a detailed breakdown of mortgage costs and expenses. Along with the Loan Estimate, you can use this information to negotiate better loan terms with lenders. For example, if one lender is proposing higher closing costs but a lower mortgage rate, use the Loan Estimate or Lender Fees Worksheet to see if the lender will match the lower costs. Or you can attempt to negotiate lower costs for specific fees. The more proposals and information you have, the more leverage you have to obtain the best loan terms from lenders.
The Loan Estimate must be delivered by the lender to the borrower in-person or by email or mail within three business days of the borrower submitting a mortgage application to the lender. If the Loan Estimate is provided by mail, it may take longer than three days for the borrower to actually receive it. For example, the lender may put the Loan Estimate in the mail three days after the borrower submits a mortgage application and it may take an additional two-to-three days for the borrower to receive the document. If you are working with a mortgage broker either the mortgage broker or the funding lender may provide the Loan Estimate but the funding lender is legally responsible for the Loan Estimate document.
Lenders are not permitted to require the borrower to provide documents that verify the information on the borrower’s mortgage application before providing the Loan Estimate. Additionally, lenders cannot charge borrowers a fee for providing a Loan Estimate. The only fee a lender can charge the borrower before providing the Loan Estimate is a small credit report fee, which is usually less than $30. If a lender attempts to charge you to take a mortgage application or to provide a Loan Estimate, immediately stop working with that lender, report the lender to the Consumer Finance Protection Bureau (CFPB) and select a different lender.
It is important to highlight that regulators created the Loan Estimate to increase mortgage shopping. They want to make it as easy as possible for you to obtain the document from several lenders so you can compare refinance proposals. That is why the cost and document requirements are relatively minimal. We recommend that you contact multiple lenders in the table below to request Loan Estimates. Shopping for your refinance enables you to find the loan and lender that best meet your needs.
The Loan Estimate must be provided to the borrower in writing -- a verbal Loan Estimate is not permitted. If the lender provides the borrower a written estimate of the mortgage terms other than the Loan Estimate, the estimate must include disclosure at the top of the estimate that indicates that the mortgage terms are subject to change. The Loan Estimate is a standard document so it should be clear to borrowers if they have received it.
Lenders generally may not issue a revised Loan Estimate because they made technical errors or underestimated fees. For example, if a lender makes a mistake on an Loan Estimate, such as omitting a fee, the lender is responsible for the error and the borrower is not required to pay that fee. Lenders can only issue a revised Loan Estimate when they receive new or updated information about the borrower or mortgage that causes the interest rate or fees to increase.
Circumstances that may cause the terms of the mortgage to change include a revised credit report, receipt of the appraisal report, the borrower deciding to change the down payment or the borrower deciding to lock the interest rate during the course of the mortgage process. A revised Loan Estimate must be issued no later than three business days after the lender receives the updated information and no later than seven business days before the close of the mortgage.
Prior to your refinance closing, you can compare your Loan Estimate with the Closing Disclosure document to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the Loan Estimate. The Closing Disclosure is a document that the lender must provide to borrowers three days prior to the refinance closing that details the final terms of your mortgage.
Significant differences between the Loan Estimate and Closing Disclosure (e.g., an increase in interest rate or higher borrower costs), may be a sign that you are not getting the mortgage you thought you were and that you are possible getting ripped off. Comparing the Loan Estimate to the Closing Disclosure helps you hold lenders accountable for the commitments they make at the beginning of the refinance process and also helps you avoid a bait and switch by the lender.
Use our personalized mortgage quote feature to compare no obligation refinance proposals from lending lenders. Our quote feature is free, easy-to-use and does not impact your credit. Comparing refinance quotes enables you to find the best loan terms.
Loan Estimate: https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-estimate-en-1995/