After you apply for a mortgage, your lender sends you a Loan Estimate. This standardized form shows your interest rate, monthly payment, closing costs and cash to close, so you can compare offers. Learning how to read a mortgage Loan Estimate helps you understand what you are paying for and choose the right loan.
The short answer: the Loan Estimate is a three-page form that shows your loan terms, projected payments, closing costs and cash to close. Compare the interest rate, APR, monthly payment and total costs side by side. See our mortgage broker vs. bank guide for how different lenders may structure offers.
What is a Loan Estimate?
A Loan Estimate is a standardized form lenders must give you within a set time after you apply for a mortgage. It shows the key terms of your loan in a consistent format, so you can compare offers from different lenders.
The form has three pages:
- Page 1: loan terms, projected payments and cash to close.
- Page 2: a detailed breakdown of closing costs.
- Page 3: additional information and comparisons.
Because the format is the same from lender to lender, you can compare offers line by line.
Key terms on page 1
Loan amount
This is the amount you are borrowing, after your down payment. It is not the same as the purchase price.
Interest rate
Your interest rate is the cost of borrowing, shown as a percentage. A lower rate means a lower monthly payment (for the same loan amount and term).
Monthly payment
Your projected monthly payment includes principal and interest, and often property taxes, homeowners insurance and mortgage insurance. This is your total monthly housing payment if all those items are included.
Prepayment penalty
The form shows whether your loan has a prepayment penalty — a fee for paying off the loan early. Most modern mortgages do not, but check this section.
Projected payments
This section breaks down your monthly payment over time, including:
- Principal and interest
- Mortgage insurance, if required
- Estimated property taxes
- Estimated homeowners insurance
It may show different payment amounts if your rate or costs can change (for example, with an adjustable-rate mortgage).
Closing costs (page 2)
Page 2 breaks your closing costs into two main groups:
Loan costs
- Origination charges: fees from the lender for processing the loan.
- Services you cannot shop for: fees for services the lender requires, like an appraisal or credit report.
- Services you can shop for: fees where you may choose the provider, like title insurance.
Other costs
- Taxes and government fees
- Prepaid items (like insurance and interest)
- Initial escrow deposit
- Any additional items
Review each fee and ask your lender to explain anything you do not understand.
Cash to close
Cash to close is the amount you need to bring to closing. It includes your down payment plus your closing costs, minus any credits or deposits already paid (like earnest money).
This is the number to watch. It tells you the total cash you need to close on the loan.
APR
The annual percentage rate (APR) reflects the interest rate plus certain loan costs, giving you a broader measure of the loan's cost. Because the APR includes some fees, it is often higher than the interest rate.
The APR can help you compare offers, but it is not the only number that matters. Look at the rate, the monthly payment and the total closing costs together.
How to compare offers
When you have Loan Estimates from more than one lender, compare:
- Interest rate: a lower rate usually means a lower payment.
- APR: a broader measure of cost, including some fees.
- Monthly payment: what you will actually pay each month.
- Closing costs: the total fees due at closing.
- Cash to close: the total cash you need to bring.
Do not compare only the rate. A loan with a slightly lower rate but much higher fees may cost more overall. Use the APR and the total costs to compare the full picture.
What to check before you commit
- Is the loan amount correct?
- Is the rate fixed or adjustable?
- Is there a prepayment penalty?
- Are the monthly payment and cash to close what you expected?
- Do the closing costs match what you discussed?
- Are there any fees you do not understand?
Ask your lender to explain anything that looks different from what you expected.
Frequently asked questions
Is the Loan Estimate a loan approval? No. It is an estimate of your terms and costs. Approval comes later, after underwriting.
How soon do I get a Loan Estimate? Lenders must send it within a set time after you apply. Ask your lender for the exact timing.
What is the difference between the interest rate and the APR? The interest rate is the cost of borrowing. The APR includes the rate plus certain fees, giving a broader measure of the loan's cost.
Can I compare Loan Estimates from different lenders? Yes. Because the form is standardized, you can compare offers line by line.
Ready to get your Loan Estimate?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Loan terms and costs vary by lender, loan and borrower. Speak with a qualified professional about your individual situation.
