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Understanding Mortgage Costs

Holden Lewis: The loan estimate form: What it tells you about a mortgage offer

Nov. 12, 2015

By HOLDEN LEWIS - Tribune News Service

How much is this mortgage going to cost me? How much would the closing costs be for this mortgage? And how do the closing costs compare with other loan offers?

You'll find the answers to those and other questions by reading and comparing the loan estimate, a three-page document that summarizes the details of a loan offer, including:
  • Loan amount, interest rate and estimated monthly payments.
  • Itemized closing costs and how much cash you'll need at closing.
  • Your total costs in the first 5 years of the loan.
  • The annual percentage rate, or APR, and total interest percentage, or TIP.
  • How much late payments will cost.
  • How often the payments can change, and by how much (if it's an adjustable-rate mortgage).
  • Whether the loan is assumable, and other important elements.
Here, we break down several key sections of the loan estimate.

How Much Will My Payments Be for This Mortgage?
Your estimated monthly mortgage payment is listed under the "projected payments" section on Page 1 of the loan estimate. This section divides the mortgage payment into three parts:
  1. Principal and interest. This is the portion of the payment that goes to the bank to pay off the amount you borrowed, plus interest.
  2. Mortgage insurance. If you borrow more than 80 percent of the home's value, the lender will require you to pay mortgage insurance. This is how much mortgage insurance will cost per month.
  3. Estimated escrow. This is an estimate of the monthly cost of your property taxes and homeowners insurance.

What's the Interest Rate on the Mortgage?
The loan's interest rate is listed toward the top of Page 1, in the "loan terms" section. The same section lists the loan amount and the monthly principal and interest.

If the mortgage offer is for a fixed-rate loan, the box to the right will say, "no," to indicate that the interest rate cannot increase after closing. But if the box says, "yes," then the mortgage offer is for an adjustable-rate mortgage, or ARM.

Two other interest rate-related numbers appear on Page 3, in the "comparisons" section:
  1. The annual percentage rate, or APR, is a calculation that results from adding closing costs to the total interest paid over the life of the loan.
  2. The total interest percentage, or TIP, represents the total interest paid over the life of the loan as a percentage of the loan amount. For example, if you borrowed $100,000 and then paid $82,000 interest over the next 30 years, the TIP would be 82 percent.
The loan term is the number of years it will take to pay off the mortgage in equal monthly installments. The most common loan term is 30 years. The 15- and 20-year loan terms are popular, too.

How Much Will the Closing Costs be for This Mortgage?
The estimated closing costs appear in two places on the loan estimate:

The total closing costs are summarized in the "costs at closing" section at the bottom of Page 1.

Mortgage Fees
The "loan costs" section lists the fees associated with getting the mortgage. These fees include:
  • Origination charges levied directly by the lender. They may include charges such as points, underwriting or origination fee and tax service fee.
  • Third-party services that you cannot shop for because the lender chooses the service provider. These services may include the appraisal, credit report, flood certification, flood monitoring, tax monitoring, tax status research and others.
  • Third-party services that you can shop for. These services may include the survey, pest inspection, title search, title insurance and title agent or escrow agent.
The dollar figures in the loan estimate are supposed to be accurate, but lenders have leeway to underestimate some fees, while other fees have to be exactly on the money.

Homebuying Fees
While the "loan costs" section lists fees for getting the loan, the "other costs" section lists fees that, for the most part, have to do with buying or owning the home itself. These fees may include:
  • Taxes and other government fees.
  • Prepaid items. These are charges that are paid immediately to the recipients, such as the first payments for homeowners insurance, mortgage insurance and property taxes, plus several days' worth of mortgage interest.
  • Escrow payments. These charges are deposited into your mortgage's escrow account for payment of future bills for homeowners insurance and property taxes.
  • Other items, such as an optional owner's title insurance policy.
The total closing costs equal the total of all the above. But the closing costs do not equal "cash to close," or the amount of money that the borrower will have to take to the closing table.

About the Writer
Holden Lewis is the mortgage analyst and assistant managing editor of

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Distributed by Tribune News Service.

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