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The Truth-in-Lending Disclosure Statement is now the Loan Estimate (for Most People)

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If you’ve applied for a mortgage in the past, you probably received a Truth-in-Lending Disclosure Statement and Good Faith Estimate. These documents let you know what to expect as far as costs associated with taking out and closing on a mortgage or other real-estate-related loan.

As of Oct. 3, 2015, however, those documents were, for most individuals taking out a mortgage, replaced by the Loan Estimate.

What is the loan estimate?

Your Loan Estimate serves much the same purpose as the Truth-in-Lending disclosure and the Good Faith Estimate: It alerts you to the likely costs of taking out a particular mortgage on a specific property. It, combined with the Closing Disclosure, makes up a streamlined disclosure documentation process under the Consumer Financial Protection Bureau (CFPB) Know Before You Owe initiative.

Your Loan Estimate should be issued within three business days of the financial institution receiving your application.

What’s Included?

There’s a wealth of information included in your loan estimate, and we’ve explained some of the crucial components below. Make sure you understand each line item so you can effectively compare your options with different lenders.

Loan term

This is the period in which you will be making payments on your loan. At the end of your term, you’ll presumably have everything paid off as long as you’ve been making on-time payments every month. Common loan terms included the 30-year, fixed-rate mortgage, and the 5/1 adjustable-rate mortgage (ARM).

Loan purpose

This is the reason you’re taking out the loan. If you’re buying a home, the loan purpose will be “purchase.” Another potential purpose would be “refinance.”

Product

Your product, as noted above, could be a fixed– or adjustable-rate mortgage.

Loan type

This is the type of loan you take out. For example, your loan type could be conventional, FHA or VA.

Rate lock

If your rate is locked, that means you have until the printed date to close. Otherwise, the offered interest rate could change, or you have to pay to extend the lock. Locks come in 15-day increments —  30, 45 or 60 days, commonly — and they typically max out at 60 days.

Remember: If your rate isn’t locked, it’s subject to change ahead of your closing.

Loan amount

Put simply, this is how much money you’re borrowing. Take the loan amount and add it to your down payment. The sum should be the total sales price of the property.

Interest rate

The interest rate is how much it will cost you to borrow money from your lender, relative to the loan amount. On your Loan Estimate, you will find the word “NO” printed next to the interest rate if you have a fixed-rate mortgage.

Prepayment penalty

On many loans, you can pay off your loan early without penalty by applying extra payments to your principal. If you’re not allowed to do this, there will be a prepayment penalty for paying off your loan early; the terms of that penalty will appear in this section of the Loan Estimate.

Balloon payment

Mortgages with balloon payments require small payments upfront, but then require an extremely large payment further down the line. It’s worth noting that such loans are considered risky by the CFPB, particularly if the value of your home drops, if you’re unable to sell or refinance, or if you can’t afford the payment when it comes due.

Estimated monthly payments

Your total monthly payments will include principal and interest on your loan, mortgage insurance and escrow for taxes. Escrow can potentially include other costs like homeowners association fees, too.

The total estimated monthly payments on your Loan Estimate will include all three of these line items.

Estimated taxes, insurance and assessments

If you are not escrowing these costs, they will be in addition to your estimated monthly payments. If you are participating in escrow, then they are already factored into your estimated monthly payment.

Estimated cash to close

This is how much money you’ll need on hand — typically via a cashier’s check or wire transfer — in order to close on your mortgage. This number includes closing costs.

Origination charges

Some lenders will charge an origination fee. It’s usually calculated as a percentage of your loan amount. This is included in your estimated cash to close, and should be compared closely among potential lenders when you’re shopping around..

Services you can’t shop for

There are certain services and fees that you must pay through your lender’s required vendor. While you cannot shop for different vendors within the context of an individual loan, you can compare quotes for this entire section from different lenders and pick the most competitive lender among them.

Services you can shop for

For certain necessary expenses that come with buying a home, like a pest inspection fee or survey fees, you can shop around. The lender gives you a ballpark figure in the Loan Disclosure, but you may find better or worse prices by doing your own research.

Lender credits

You’ll find lender credits on your Loan Estimate when you trade a higher interest rate for a rebate from your lender. In such a circumstance, you get some money back now, but will pay more every single month over the course of your loan.

Comparisons

This section includes key numbers, like APR and the amount of principal you will have paid off after five years of minimum monthly payments on your mortgage. These numbers are meant to help you easily compare the same loan type from one lender to the next.

Late-payment terms

Late-payment terms define the late fee you’ll incur if you’re a certain amount of days past the due date for your  monthly payment.

Are these terms final?

No, the terms you find on a Loan Estimate aren’t final, but if your lender makes changes, you will receive a revised Loan Estimate. If you receive a revised Loan Estimate, ask why the changes happened. It may be because of home appraisal results, changes to your credit score or interest-rate changes if you didn’t lock in, among other things.

You will find finalized terms in your Closing Disclosure, which your lender is required to give you at least three days before closing.

Is a loan estimate free?

The Loan Estimate, in and of itself, is free, though you may have to pay for a credit check as a part of the application process. Any other fees charged before you have the estimate in hand are illegal.

Will you still get a truth-in-lending disclosure?

If you’re taking out a mortgage or refinancing one, you will get a Loan Estimate. However, if you’re taking out a reverse mortgage or home equity line of credit (HELOC), you will still get a truth-in-lending disclosure. With a reverse mortgage, you will also be issued a good faith estimate.

 

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