Wondering How Much Closing Costs Are? Look at the Loan Estimate Form
How much are closing costs, really? When it comes to nearly anything else in life that you buy, you know the price up front. You buy a bag of bananas, it’s 49 cents a pound. You order a new laser printer, it’s a couple hundred bucks. You know what it’s going to cost, to the penny, before you agree to buy the thing.
Mortgages are a little bit different. Many changes have been put in place to help you, the consumer, have a better idea what you’re going to pay for your loan and the services surrounding their real estate purchase. But the best anyone can really do is give you an estimate. These used to be called Good Faith Estimates, but since October 15, 2015 the Loan Estimate and Closing Disclosure Forms have taken over the job.
Note: This article is part one in a two-part series about closing costs on your mortgage. Part two is all about the Closing Disclosure Form.
The Purpose of the Loan Estimate Form
Within three days of making a full mortgage loan application, you’ll get a loan estimate form, among other things. The loan estimate form is meant to give you a way of comparing mortgage loan offers side by side, so it’s easy to see exactly what each loan will cost you, both in the immediate future and over the longer term.
Theoretically, this form is really quite accurate and can tell you exactly how much you’ll need to bring to closing -- to the penny. In practice, they’re more like a best guess, so don’t obsess about the exact numbers, just realize that the estimate is fairly close. If it shows that your closing costs are going to be $11,000, it’s possible they might be $11,500 or $10,500 due to an incorrect estimate on taxes, insurance, or HOA fees, for example. Until you see the Loan Estimate Form’s evil twin, the Closing Disclosure Form, remember that the important term here is “estimate.”
Now, let’s take a tour of this fancy piece of paper!
Loan Estimate Form Details
Here’s a copy of the Loan Estimate Form for you to follow along if you’re into that sort of thing. We’ll wait while your PDF loads. Is it loaded? Are you psyched?
The Loan Estimate Form is meant to be easy to understand, but it’s still kind of soaked in real estate and mortgage terminology. For the first-time homebuyers out there, we’ll walk you through it. (If you’re an advanced student, feel free to help some of the kids who may need more personalized attention.)
These are the sections you’ll see on the first page: Header, Loan Terms, Projected Payments and Costs at Closing.
Loan Estimate Form: Header
Typically, you’ll get your Loan Estimate Form once you have a house under contract, but in some markets it’s helpful to ask your lender to do a dummy form so you can know what to expect when you do find a house. Hot markets may simply not allow you time to do this later, so take care of it early.
The Loan Estimate Form header contains basic information, including:
- The name and address of the bank from which it came
- The day it was issued
- Name of the applicants
- Address of the property you have under contract (even if it’s imaginary)
- Sale price of said house (real or not)
- Loan term
- Purpose of the loan (purchase, refinance, etc)
- Type of loan
- Loan ID# (you won’t have this on a mock up)
- Whether or not your rate is locked and for how long (you also won’t have this on a mock up)
Loan Estimate Form: Loan Terms
The “Loan Terms” section of the Loan Estimate Form is where you’ll start to get the details you’re looking for. These two small, seemingly innocent looking tables will ultimately determine if your loan succeeds or fails. This is your mortgage destiny, so to speak.
Loan Amount. The first line should reflect the amount you intend to borrow. If you’re buying a $200k house and putting $20k down, it should read $180k. If it doesn’t, say something. To the right of this amount is one of two words: “yes” or “no.” If it says “yes,” reconsider working with this lender. The reason? “Yes” means that this amount can increase after closing. Any loan that will let you negatively amortize isn’t a loan you want to be involved with. Sure, it sounds awesome to be able to just not make payments, but that’s how economies come crashing down.
Interest Rate. Whatever rate you’ve discussed with your lender should be in this box. The yes/no will tell you if it’s a fixed rate or an adjustable rate. If it’s adjustable, next to the word “yes,” there should be an explanation of how much the rate can fluctuate.
Monthly Principal & Interest. This is your payment for the first year (maybe). Even this line says it’s an estimate of an estimate. So, good luck with that. But it’s a starting point that puts all loans you’re considering on an even playing field, and that’s the real purpose here. Don’t cling to this payment amount. Can it fluctuate? If you have an ARM, it absolutely will.
Prepayment Penalty. This is another one of those lines that has only one right answer. That answer is “no.” A prepayment penalty is literally an extra fee for paying off a significant portion of your loan ahead of time. So, if you need to refinance or sell earlier than you imagined, a “yes” in this box may lead to big trouble for you.
Balloon Payment. Again, the answer here is better if it’s “no.” However, a balloon payment is slightly better than a prepayment penalty, especially if you have good credit. What a balloon does is allows you to make the same payment you would if the loan was for a longer term. However, the loan terminates early (say, after 5 years instead of 15), leaving a remaining balance. At that point, you’ll be forced to pay the balance in cash or to refinance, otherwise it’ll get pretty nasty.
Loan Estimate Form: Projected Payments
The Projected Payments section is a really handy thing to use for reference, but again, don’t assume it’s perfect. This is just an estimate. In this section, you’ll find your mortgage payment explained in detail, with all the parts labeled individually and a total below. There’s a column for the period of time during which you’re assumed to have mortgage insurance, and a column for life after mortgage insurance.
Your escrow payment is also in this section. It says “amount can increase over time.” This is a fallacy. The amount will certainly increase over time because homeowners’ insurance goes up every year and your taxes will definitely increase as your property value does. If you live in an area of declining values that causes your escrow to remain the same or drop, you may want to reconsider buying a house in that area.
At the bottom of this section, there’s an explanation of how the escrow figure was determined. In general, most lenders prefer that you have your taxes, HOA fees, and homeowners’ insurance escrowed. That’s how they know they’re covered in case something goes terribly wrong. They make the payment so you won’t forget and accidentally end up with a tax sale on your hands.
Loan Estimate Form: Closing Costs (Costs at Closing)
You’re going to find two headers here: estimated closing costs and estimated cash to close. And immediately, you’re going to look around and scream, “aren’t those two things the same!?” Sit down, have a nice cool drink, and we’ll explain.
The Estimated Closing Costs are what you’ll get if you ask someone “How much are closing costs on my mortgage?” It’s a total of the loan fees, closing fees, the money needed to start your escrow fund, other random fees, and any lender credits you may have kicking around. This is literally the “closing costs” part of the equation.
But, you also have to bring your down payment to closing, at least most of the time. So, you’ll include the other money you have to produce in order to close under “Estimated Cash to Close.” That $20k down is extra, and it’s got to get to the lender somehow.
Answering the Big Question: How Much are Closing Costs on My Mortgage?
Page Two is basically a worksheet explaining your closing fees and how much they are. You’ll see your loan origination cost, a list of services you can (and can't) shop around for, your taxes, prepayment requirements, your escrow account deposits, and other things like your title insurance.
Additional Information About This Loan
Don't let the fact that this section appears at the end fool you: the last page is highly informative. The header isn’t much, but that section that says “Comparisons” is everything.
The first line explains how much money you will have paid on your mortgage after five years. It should contain two numbers. One is the total you’ll have paid, including principal, interest, taxes, insurance and other fees. The other is just the principal you’ll have paid. This line is very useful for comparing mortgage products.
The second line is the Annual Percentage Rate. This is not the same as the Interest Rate. Your Interest Rate is just the interest that accumulates as your mortgage goes on with its life. The APR is what you get when you take all the loan costs plus the interest and divide that over the loan term and express it as a percentage. It’s supposed to make it easy to see if the fees between two loans are roughly similar, but it really just serves to scare a lot of people. Don’t panic.
The Total Interest Percentage is a truly terrifying number if you just glance at it. Generally, the smaller your TIP, the better, but it’s always going to be pretty huge. It’s the amount of interest you’ll pay over the life of the loan, expressed as a percentage of what you borrowed. So, you borrow $200k and you pay $100k in interest over the lifetime of the loan, your TIP is 50 percent.
Your Loan Estimate Form is Your Key to Mortgage Bliss
There’s so much uncertainty when you’re buying a house -- the anxiety can feel unbearable at times. That’s why it’s nice to have things like the Loan Estimate Form in hand when you’re trying to figure out the next step. But you don’t have to make any of this journey alone, your friendly neighborhood loan expert is ready to take your questions at Home.Loans.
Anyway, we’re almost out of rubber bands for the giant rubber band ball and Brian won’t go to the office supply store to get more. Contact home.loans with your questions so we can look like we’re busy working!