Hidden Costs: What's Not In Your Loan Estimate

A loan estimate is a standard three-page document that presents home loan information in an easy-to-read format. It is provided by the lender and contains details about the mortgage, including the estimated interest rate, monthly mortgage payment, and closing costs. It is important to note that receiving a loan estimate does not guarantee loan approval. It is a tool that allows borrowers to compare loan offers from different lenders and make an informed decision. When reviewing a loan estimate, it is essential to look for any discrepancies or missing information, such as lender credits or third-party fees, and seek clarification from the loan officer if needed.

Prepayment penalties

A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you refinance early into your loan term, you will trigger the prepayment penalty. The fee is an incentive for borrowers to pay back their principal on schedule for a loan's entire term, allowing mortgage lenders to collect their planned interest. Prepayment penalties are added to a mortgage contract to protect lenders from the loss of interest payments over the life of the loan. The first few years of a loan term are riskier for the lender than the borrower.

Federal law requires lenders to disclose all information about any prepayment penalties. If you do have a prepayment penalty, it should be listed in the loan estimate or in any disclosure documents. You can also ask the lender if there is a prepayment penalty. If they say yes, ask them to show you where you can find the details in the paperwork. The prepayment clause in your mortgage agreement will walk you through how to pay off your loan early. This section of the paperwork will discuss exactly what you need to do to pay off your mortgage ahead of schedule. It will also outline when you might incur a prepayment penalty, and how much it will be.

A Loan Estimate is a three-page form that you receive after applying for a mortgage. It gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. The form indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you. When you receive a Loan Estimate, the lender has not yet approved or denied your loan application.

The Loan Estimate also shows you where you'll find information on your own form. When you select any of the items on the Loan Estimate, the tool highlights the information on the image and also highlights the explanation. You can download the sample Loan Estimate if you'd like to print it or just get a better look. You can use this tool to review your Loan Estimate to make sure it reflects what you discussed with the lender.

Balloon payments

A balloon payment is a large, one-time payment due at the end of a loan term. Balloon payments are generally more than twice the loan's average monthly payment and can be a significant portion of the entire loan amount. The interest rate is usually higher for a balloon loan, and only borrowers with high creditworthiness are considered.

The loan is structured so that the borrower makes small monthly payments, paying off only a fraction of the principal balance, and the remainder of the loan is due all at once in what is known as a balloon payment. Balloon payments are an option for home mortgages, auto loans, and business loans. They are available to consumers but typically only for those with a hefty down payment and a healthy credit rating. When used for a home mortgage, the balloon payment carries extra risks. The buyer is paying mostly interest or only interest and counting on price growth to provide equity.

Balloon loans are popular in construction and home flipping. They are also often packaged into two-step mortgages, where the borrower receives a lower interest rate at the start of their loan, which then shifts to a higher interest rate after an initial borrowing period. Balloon loans can be attractive to short-term borrowers because they typically carry lower interest rates than loans with longer terms. However, the borrower must be aware of refinancing risks, as there is a possibility the loan may reset at a higher interest rate.

Before the end of the loan term, when the balloon payment is due, the borrower may be able to refinance the loan to avoid the balloon payment. However, if the value of the property falls, or if the borrower's financial condition declines, they might not be able to do so. If the borrower cannot pay the balloon mortgage, even if it is the last payment, they could face foreclosure.

Interest rate increases

A loan estimate is a standard three-page document that you receive after applying for a mortgage. It provides information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.

When you receive a loan estimate, the lender has not yet approved or denied your loan application. The loan estimate also indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization).

If you receive a revised loan estimate with a higher interest rate, this could be due to a number of factors, including:

• Changes to the kind of loan, for example, moving from an adjustable-rate to a fixed-rate loan.
• Reducing the amount of your down payment.
• A lower-than-expected appraisal of the home you want to buy.
• Changes to your credit score, such as taking out a new loan or missing a payment on another loan.
• The lender could not verify your income, including overtime, bonus, or other income.
• The interest rate on your loan was not locked, and locking the rate caused the points or lender credits to change.

It is important to review your loan estimate carefully and compare it to other lenders' offers to ensure you are getting the best rate and terms for your mortgage.

Monthly principal and interest payments

Understanding the monthly principal and interest payments is crucial when considering a loan offer. The principal is the original loan amount you borrow, excluding any interest. For instance, if you purchase a $355,000 home with a $55,000 down payment, the principal would be the remaining $300,000 borrowed from the mortgage lender. This amount, known as the loan principal or loan amount, is what you need to repay over the loan term, along with the interest.

Interest, on the other hand, is the cost of borrowing money, representing the lender's charge for lending you the funds. It is calculated as a percentage of the total borrowed amount, and it can be either simple or compound. Simple interest remains constant over the loan term, while compound interest accrues on the principal and any accumulated interest. The interest rate is a critical factor in determining the monthly payment amount, as it is used to compute the interest expense. Lenders consider various factors when setting interest rates, including the loan term, credit history, market conditions, and the amount borrowed.

Calculating the monthly principal and interest payments can be done using online loan calculators or by hand. For a simple interest loan, you can determine the monthly principal payment by dividing the principal amount by the number of months in the loan term. To find the total interest on such a loan, multiply the principal by the interest rate, and then by the loan term. Amortized loans, like mortgages, are more complex, as they involve paying more interest at the beginning, and the calculation depends on the loan's structure.

It is important to note that the monthly principal and interest payments are typically not the only components of your total monthly payment. Additional charges, such as taxes, insurance, and escrow, may be included in your monthly mortgage payment. These extra costs can significantly impact your overall financial obligations, so it is essential to review the Loan Estimate carefully and understand all the fees associated with the loan.

Lender credits

If you were promised lender credits verbally and they do not appear on the Loan Estimate, ask your loan officer for clarification. It is important to understand how closing costs are accounted for and to review the Loan Estimate to ensure it reflects what was discussed with the lender.

Frequently asked questions