How to read a Loan Estimate before you sign

The Loan Estimate is a federally standardized three-page document the lender must give you within three business days of a mortgage application. It's the most important piece of paper in the entire homebuying process, and it's specifically designed to be readable. The catch: most buyers see it for the first time during the rush of closing prep and skip past the parts that matter.

This is what to actually look for, in order.

Page 1: the loan terms

The top of page 1 has the deal summary — loan amount, interest rate, monthly principal and interest, and key features (prepayment penalty, balloon payment, etc.).

The two columns that matter most:

• "Can this amount increase after closing?" asked for each major loan feature. A standard fixed-rate mortgage answers "No" to all of these. A "Yes" answer next to "Interest Rate" means it's an adjustable-rate mortgage — verify that's what you actually wanted, not a fixed.
• Prepayment penalty. Should be "No" for almost any owner-occupied loan. A "Yes" means you'd pay a fee for paying off the loan early — a rare and outdated feature on consumer mortgages.

Page 1: projected payments

A table showing your expected monthly payment over time. For a fixed-rate loan, it should show a single column with principal, interest, mortgage insurance (if applicable), and estimated escrow (taxes and homeowners insurance).

Two things to verify:

• Estimated taxes and insurance. The lender's estimate is often low. Look up the property tax bill on the county assessor's site and compare. If the lender's monthly tax escrow is materially below 1/12 of last year's actual tax bill, your monthly payment will jump after the first escrow analysis.
• Mortgage insurance. If your down payment is under 20%, you'll pay private mortgage insurance (PMI) on a conventional loan, or mortgage insurance premium (MIP) on FHA. Confirm the monthly amount and when it can be removed — typically when the loan-to-value ratio reaches 78-80% on a conventional loan.

Page 2: closing cost details

This is where lenders can hide things. The page is split into clearly labelled sections.

A. Origination charges. What the lender is charging to make the loan. Includes "discount points" if you opted to pay points to buy down the rate. Discount points are optional — if you didn't ask for points, this line should be zero.

B. Services you cannot shop for. Appraisal, credit report, lender's title insurance (in some states). Fixed costs the lender selects the provider for.

C. Services you can shop for. Notably title insurance (in most states), survey, pest inspection. You can use the lender's recommended provider or shop your own — the disclosure has to tell you which.

E. Taxes and other government fees. Recording fees, transfer taxes where applicable. Fixed.

F. Prepaids. Per-diem mortgage interest from closing to month-end, the first year of homeowners insurance, prepaid mortgage insurance.

G. Initial escrow payment at closing. Funds the escrow account for future tax and insurance payments. Typically 2-3 months of each held in reserve.

H. Other. Owner's title insurance (your protection — the lender's title insurance in section B protects the lender, not you).

Total "Estimated Closing Costs" should land in the 2-5% of loan amount range. Higher is unusual and warrants a question.

Page 2: cash to close

The total cash you'll bring to the closing table. Includes closing costs from above, your down payment, and credits for deposits you've already made.

This number should match your savings reality. It's the moment to verify you have the liquid funds available — not invested, not in retirement, not promised to another expense.

Page 3: comparisons

The "In 5 Years" line shows how much you'll have paid in principal and interest over the first five years of the loan, and how much principal you'll have paid off. Useful for understanding how front-loaded the interest is.

The "Annual Percentage Rate (APR)" includes the cost of the loan plus mandatory fees, expressed as an annual percentage. It's typically higher than the note rate. When comparing offers from different lenders, compare APR — not just rate — because lender fees vary widely.

Comparing two lenders

Get Loan Estimates from at least three lenders, ideally on the same day (since rates move). Compare:

1. Loan amount and rate — are they identical assumptions? If one quotes 6.50% with a $3,000 origination fee and another quotes 6.75% with no origination fee, the APR comparison matters more than the rate.
2. Origination charges. Lender markup. One of the biggest differentiators.
3. Discount points. Are they assuming you wanted points to buy down the rate? You can ask for a version without points to make a cleaner comparison.
4. Total closing costs.
5. Cash to close.

The APR on page 3 captures most of this — but only "most." Read all the line items.

What to do if something is wrong

You have the right to request a revised Loan Estimate if material facts change (down payment changes, locked rate expires, you switch loan type). The lender must reissue within three business days.

You also have a right to walk away. The Loan Estimate is not a contract. Up to the day of closing, you can switch lenders or back out of the loan. (Walking away from the purchase is a different question — that depends on your purchase contract and contingencies.)

The clean rule

Read page 1 carefully. Verify nothing increases after closing that shouldn't. Verify the tax escrow is realistic.

Then compare page 3 APR across three lenders and pick the lowest after reading the section A and B fees side by side.

The Loan Estimate is designed so you can do this in 20-30 minutes per lender. It's the only piece of homework that reliably saves five-figure sums on a six-figure loan.