slug: loan-estimate-explained

Loan Estimate Explained: Your Complete Guide to Understanding This Critical Mortgage Document

Within three business days of applying for a mortgage, you'll receive one of the most important documents in the home buying process: the Loan Estimate (LE). This standardized, three-page form provides detailed information about your loan terms, projected payments, and estimated closing costs.

The Loan Estimate replaced the old Good Faith Estimate (GFE) and initial Truth in Lending disclosure in 2015 as part of the TILA-RESPA Integrated Disclosure (TRID) rule. Its standardized format makes comparing loan offers from different lenders much easier—but only if you understand what you're reading.

This comprehensive guide walks through every section of the Loan Estimate, explains what each number means, identifies potential issues to watch for, and shows you how to use this document to make informed mortgage decisions.

What Is the Loan Estimate?

The Loan Estimate is a standardized federal disclosure form that provides:

• Loan terms (interest rate, monthly payment, total costs)
• Projected payments over time
• Detailed closing cost breakdown
• Information about cash needed to close
• Important disclosures about loan features

Key characteristics:

• Required within 3 business days of loan application
• Uses standardized format across all lenders
• Facilitates apples-to-apples comparisons
• Estimates only—some costs may change
• Legally binding for certain fees

Why the Loan Estimate Matters

The Loan Estimate serves several critical functions:

1. Transparency: You see all loan costs upfront before committing

2. Comparison: Standardized format lets you compare lenders easily

3. Protection: Certain fees cannot increase; others have caps on increases

4. Planning: Shows how much cash you need to bring to closing

5. Decision-making: Provides complete information before you lock your rate

The Three-Page Breakdown

Page 1: Loan Terms, Projected Payments, and Costs at Closing

Page 1 provides the essential information about your loan in three main sections.

Section 1: Loan Terms

This section details the fundamental structure of your loan:

Loan Amount: The amount you're borrowing. This should match your purchase price minus down payment (or your refinance amount).

Interest Rate: The rate used to calculate your monthly payment. Look for whether this rate "Can increase" (adjustable) or "Cannot increase" (fixed).

Monthly Principal & Interest: Your base payment before taxes, insurance, and HOA dues. This is what you'll pay toward loan [principal and interest](/blog/amortization-schedule-guide) only.

[Prepayment Penalty](/blog/dscr-loan-prepayment-penalty): Indicates whether you'll be charged a fee for paying off the loan early. Most modern mortgages have "NO" in this field.

Balloon Payment: Indicates whether you'll owe a large lump sum at some point. Most mortgages have "NO" in this field.

Example:

Loan Amount: $400,000
Interest Rate: 4% (Cannot increase)
Monthly Principal & Interest: $1,909.66 (Can increase; see note)
Prepayment Penalty: NO
Balloon Payment: NO

The note might explain: "Your monthly principal and interest payment can increase if your property taxes or homeowner's insurance increases."

Section 2: Projected Payments

This critical section shows how your payment may change over time.

Years 1-7 (or First Adjustment): Shows your payment for the initial period, broken down into:

• Principal & Interest
• Mortgage Insurance (if applicable)
• Estimated Escrow (taxes, insurance, HOA)
• Total Monthly Payment

Years 8-30 (or After Adjustment): Shows how the payment changes if:

• ARM rate adjusts
• Mortgage insurance drops off
• Escrow amounts change
• Interest-only period ends

Example for Fixed-Rate Loan:

Years 1-7:
Principal & Interest: $1,910
Mortgage Insurance: $0
Estimated Escrow: $650
Total Monthly Payment: $2,560

Years 8-30:
Principal & Interest: $1,910
Mortgage Insurance: $0
Estimated Escrow: $715
Total Monthly Payment: $2,625

(Escrow increases; P&I stays the same)

Example for [5/1 ARM](/blog/arm-vs-fixed-rate-mortgage):

Years 1-5:
Principal & Interest: $1,687
Mortgage Insurance: $167
Estimated Escrow: $650
Total Monthly Payment: $2,504

Years 6-30:
Principal & Interest: $1,910 to $2,416
Mortgage Insurance: $0
Estimated Escrow: $715
Total Monthly Payment: $2,625 to $3,131

(Shows range due to potential ARM adjustments)

Important disclosures:

• "Estimated Taxes, Insurance & Assessments are estimated; the actual amount will vary"
• "This estimate includes [specific items included in escrow]"

Section 3: Costs at Closing

This section summarizes what you'll pay:

Estimated Closing Costs: Total of all fees to close your loan (detailed on page 2)

Estimated Cash to Close: The actual check you need to bring to closing, accounting for:

• Down payment
• Closing costs
• Seller credits
• [Earnest money](/blog/earnest-money-explained) already deposited

Example:

Estimated Closing Costs: $12,000

Estimated Cash to Close: $82,000

Breakdown:
Purchase price: $500,000
Down payment: $100,000
Closing costs: $12,000
Less earnest money: -$10,000
Less seller credit: -$5,000
Plus prepaid items: $5,000
= $82,000 cash needed at closing

Page 2: Closing Cost Details

Page 2 is where many borrowers get overwhelmed. It itemizes every fee in your transaction, organized into sections A through H.

Section A: Origination Charges

Fees charged by your lender for creating the loan:

Points (Loan Discount): Optional fees paid to reduce your interest rate. 1 point = 1% of loan amount.

• Example: 1.5 points on $400,000 = $6,000

Origination Fee: Fee for processing your loan application

• Typical range: 0.5% to 1% of loan amount
• Example: 0.5% on $400,000 = $2,000

Application Fee, Underwriting Fee, Processing Fee: Various administrative fees lenders charge

• Watch for excessive or duplicate fees
• Total Section A typically ranges from 0.5% to 2% of loan amount

What to watch for:

• Multiple origination-type fees that seem redundant
• Total exceeding 2% of loan amount (may indicate excessive fees)
• Lender credits (negative amounts that reduce your costs)

Section B: Services You Cannot Shop For

Services required by your lender where you cannot choose the provider:

Appraisal Fee: Cost to determine property value

• Typical range: $400-$800 (higher for complex properties)

Credit Report Fee: Cost to pull your credit reports

• Typical range: $25-$75

Flood Certification: Determines if property is in flood zone

• Typical range: $15-$25

Tax Service Fee: Monitoring service to ensure property taxes are paid

• Typical range: $50-$90

Important: These fees CANNOT increase at closing (unless circumstances change, like ordering a second appraisal).

Section C: Services You Can Shop For

Services you're required to obtain but can choose your own provider:

Survey Fee: Boundary and structure verification

• Typical range: $300-$600

Title Insurance – Owner's Policy: Protects your ownership interest

• Cost varies by state and property value
• Example: $1,000-$3,000 for $400,000 property

Title Insurance – Lender's Policy: Protects lender's interest

• Required by lender
• Often less expensive than owner's policy

Title Search: Verifying property ownership history

• Typical range: $200-$400

Attorney or Settlement Fee: Closing agent's fee for conducting closing

• Typical range: $500-$1,500

Important: These fees can increase up to 10% at closing if you don't shop for your own providers and use the lender's recommendations.

Section D: Total Loan Costs

Subtotal of Sections A, B, and C.

Section E: Taxes and Other Government Fees

Recording Fees: County charges for recording deed and mortgage

• Typical range: $100-$500

Transfer Taxes: State/local taxes on property transfer

• Varies dramatically by location
• Can be 0% to 3%+ of purchase price
• Example: 1% of $500,000 = $5,000

These fees CANNOT increase (they're set by government entities).

Section F: Prepaids

Expenses you pay in advance:

Homeowner's Insurance Premium: First year's insurance paid at closing

• Typical range: $800-$3,000+ annually

Mortgage Insurance Premium: Upfront MI if required (FHA loans)

• FHA: 1.75% of loan amount
• Example: 1.75% of $400,000 = $7,000

Prepaid Interest: Per-diem interest from closing to end of month

• Example: Close on 15th, pay 15 days of interest

Property Taxes: Months of taxes collected to start escrow account

• Typically 2-4 months

These amounts can change based on closing date and third-party pricing.

Section G: Initial Escrow Payment at Closing

Money deposited into escrow account at closing:

Homeowner's Insurance: Typically 2 months

• Example: $200/month × 2 = $400

Mortgage Insurance: Typically 2 months

• Example: $150/month × 2 = $300

Property Taxes: Typically 2-4 months

• Example: $300/month × 3 = $900

Note: This is in addition to Section F prepaids. You're building a cushion so funds are available when bills come due.

Section H: Other Costs

Home Inspection: Not required by lender but highly recommended

• Typical range: $300-$600

Home Warranty: Optional coverage for systems and appliances

• Typical range: $300-$600 annually

HOA Fees: If applicable, sometimes collected at closing

Pest Inspection: Required in some states

• Typical range: $75-$150

Section I: Total Other Costs

Subtotal of Sections E, F, G, and H.

Section J: Total Closing Costs

Grand total of all costs (D + I).

Lender Credits: If lender provides credits to reduce your costs, shown as negative number here.

Final cost: This is the "Estimated Closing Costs" shown on page 1.

Calculating Cash to Close

The bottom of page 2 shows how to calculate your cash to close:

Total Closing Costs (J): $12,000
- Closing Costs Financed: $0
+ Down Payment: $100,000
- Deposit/Earnest Money: -$10,000
+ Funds for Borrower: $0
- Seller Credits: -$5,000
+ Adjustments and Other Credits: $0
= Estimated Cash to Close: $97,000

Page 3: Additional Information and Disclosures

Page 3 provides important additional information and required disclosures.

Comparisons

Shows three useful calculations:

In 5 Years:

• Total you will have paid: Principal, interest, mortgage insurance, and loan costs
• Principal paid down: How much loan balance will decrease
• Useful for comparing loans you might refinance before maturity

Annual Percentage Rate (APR): Total cost of loan as yearly rate, including fees

• Higher than interest rate when fees exist
• Useful for comparing loans with different fee structures

Total Interest Percentage (TIP): Total interest you'll pay over the loan life as a percentage of loan amount

• Example: TIP of 69% on $400,000 loan means $276,000 in total interest
• Illustrates long-term cost of borrowing

Other Considerations

Important features and risks:

Appraisal: Notes that you may receive copy of appraisal (you're entitled to it)

Assumption: Whether the loan can be transferred to a buyer if you sell

Homeowner's Insurance: Reminder that you must maintain insurance

Late Payment: Fee for late payments (typically 4-5% of payment after 15-day grace period)

Refinance: Note that refinancing will require paying closing costs again

Servicing: Whether the lender intends to service the loan or transfer servicing

Contact Information

Lists key parties:

• Lender
• Mortgage broker (if applicable)
• Real estate broker (buyer and seller)
• Settlement agent

Confirm Receipt

Space for you to sign acknowledging receipt (though signing doesn't obligate you to proceed with the loan).

Loan Estimate vs. Closing Disclosure

The Loan Estimate is an estimate provided early in the process. The Closing Disclosure is the final, accurate accounting provided at least 3 business days before closing.

Key differences:

Loan Estimate:

• Provided within 3 days of application
• Contains estimates
• Used for comparison shopping
• Not all fees are final

Closing Disclosure:

• Provided at least 3 days before closing
• Contains final, actual numbers
• Used to review before signing
• Legally binding

Important: Compare your Loan Estimate to your Closing Disclosure to identify any unexpected changes.

Fee Categories and Change Limitations

Federal law limits how much fees can increase from Loan Estimate to Closing Disclosure:

Zero Tolerance (Cannot Increase)

These fees cannot increase at all:

• Lender fees (origination, points, etc.)
• Fees for services borrower cannot shop for (appraisal, credit report, etc.)
• Transfer taxes

Protection: If these increase, lender must refund the difference or absorb the cost.

10% Cumulative Tolerance

These fees can increase, but total increase cannot exceed 10%:

• Recording fees
• Services borrower can shop for (if you use lender's recommended providers)

Example:

• LE shows: $1,000 for title services
• CD can show: Up to $1,100
• If CD shows: $1,150, lender owes you $50

No Tolerance Limit (Can Change)

These can change without limit:

• Services you shop for and select your own provider
• Prepaid interest
• Property taxes
• Homeowner's insurance
• Costs that increase due to changed circumstances

How to Use the Loan Estimate

Step 1: Review Immediately

Don't wait—review your LE as soon as you receive it:

• Verify loan amount is correct
• Confirm interest rate and type (fixed vs. ARM)
• Check that property address is correct
• Verify purchase price or refinance amount

Step 2: Understand Your Payment

Focus on the Projected Payments section:

• Can you afford the total monthly payment?
• How much might it increase over time?
• When will mortgage insurance drop off (if applicable)?

Step 3: Examine Closing Costs

Review Page 2 systematically:

• Are origination fees reasonable (under 2% of loan)?
• Are any fees surprisingly high?
• Do you see duplicate or unnecessary fees?
• Are you receiving seller credits as agreed?

Step 4: Calculate Cash Needed

Verify you'll have sufficient funds:

• Total cash to close
• When you need these funds available
• Where funds are coming from

Step 5: Compare Multiple Estimates

If shopping multiple lenders, create a comparison spreadsheet:

• Interest rate
• Monthly payment
• Total closing costs
• Cash to close
• APR (for apples-to-apples comparison)

Step 6: Ask Questions

Don't sign or proceed if you don't understand something:

• Why is this fee charged?
• Can this fee be reduced or waived?
• Why is my APR higher than the interest rate?
• What happens if I don't use your recommended title company?

Red Flags to Watch For

Certain items should prompt additional scrutiny:

Excessive Origination Fees

Red flag: Section A totals more than 2% of loan amount

Example: $10,000 in origination fees on $400,000 loan (2.5%)

Action: Negotiate or shop other lenders

Junk Fees

Red flag: Questionable fees like:

• "Administrative fee"
• "Document preparation fee" (beyond standard charges)
• "Email fee" or "Courier fee"
• Fees that duplicate lender services

Action: Ask for explanation; request removal

Significantly Higher Cash to Close Than Expected

Red flag: Cash needed is much higher than you calculated

Possible causes:

• Lower seller credit than negotiated
• Higher closing costs than discussed
• Down payment percentage incorrect

Action: Reconcile with your purchase agreement and initial discussions

Very High APR Relative to Interest Rate

Red flag: APR is 0.5%+ higher than interest rate

Cause: High fees relative to loan amount

Action: Compare to other lenders' APRs

Prepayment Penalty or Balloon Payment

Red flag: "YES" in these fields

Modern mortgages rarely have these features; if present, understand why

Action: Consider if this loan structure serves your needs

Questions to Ask Your Lender

When reviewing your Loan Estimate:

1. "Can you explain why [specific fee] is charged?"

   • Understand every line item

2. "Are there any fees that can be reduced or waived?"

   • Lenders sometimes have flexibility, especially to match competitors

3. "If I shop for my own [title company/attorney], what changes?"

   • Understand your shopping options

4. "What fees are locked and what might change?"

   • Know what's guaranteed vs. estimate

5. "How does your APR compare to industry average?"

   • Context for evaluating competitiveness

6. "When can I lock my interest rate?"

   • LE doesn't lock your rate automatically

7. "What happens next in the process?"

   • Understand timeline and requirements

Loan Estimate for Different Loan Types

Conventional Loans

• Straightforward LE structure
• PMI shown if down payment <20%
• Typically moderate origination fees

FHA Loans

• Upfront MIP shown in Section F (1.75% of loan)
• Annual MIP shown in monthly payment
• FHA allows higher seller contributions

VA Loans

• No PMI/MIP
• VA funding fee shown (can be financed)
• Cannot charge certain fees to veteran

HELOCs

HELOCs use different disclosure requirements:

• May not use standard LE form
• Different fee structures
• Variable rate disclosures

At HonestCasa, we provide clear, detailed disclosures for our HELOC products that explain all fees and terms comprehensively.

[DSCR Loans](/blog/best-dscr-lenders-2026)

Investment property loans may show:

• Higher rates than owner-occupied
• Different origination fee structures
• No occupancy-related disclosures

Conclusion

The Loan Estimate is your roadmap to understanding mortgage costs and comparing lenders effectively. By taking time to review each section carefully, you can:

• Identify excessive fees
• Compare offers accurately
• Budget appropriately
• Ask informed questions
• Negotiate better terms
• Avoid surprises at closing

Key best practices:

1. Review immediately upon receipt
2. Ask questions about anything unclear
3. Compare carefully if shopping multiple lenders
4. Save for reference to compare with Closing Disclosure
5. Don't rush into locking a rate before understanding all costs

At HonestCasa, we believe in complete transparency. Our loan officers walk through every line of your Loan Estimate, answer all questions, and ensure you understand exactly what you're paying for. Whether you're obtaining a traditional mortgage, HELOC, or [DSCR loan](/blog/dscr-loan-guide), you deserve clear, honest information about costs.

Your Loan Estimate is a powerful tool for informed decision-making. Use it well, and you'll navigate the mortgage process with confidence and clarity.

Related Articles

• Closing Costs Guide for First-Time Buyers: Every Fee Explained and How to Reduce Them
• Closing Disclosure Guide
• [Heloc Closing Costs Guide](/blog/heloc-closing-costs-guide)
• Interest Rate Vs Apr Explained
• [Mortgage Closing Costs Breakdown](/blog/mortgage-closing-costs-breakdown)