How to Compare Loan Estimates the Right Way

Most people open a loan estimate and their eyes glaze over. Three pages of payments, rates, fees, and line items, and almost none of it is in plain English. So they do one of two things. They look at the interest rate, or they look at the cash to close. Then they pick whichever number looks better.

That is exactly what a lender is counting on.

Here is the problem. You and another borrower can be quoted the same rate and still walk away with very different deals, because one of you is quietly paying more in fees. Compare on rate alone and you would never catch it. So let's go through what is actually on a loan estimate, where fees hide, and the numbers you should be comparing instead.

What page one tells you

The first page shows three things people fixate on: your monthly payment, your interest rate, and your cash to close.

The rate matters. It sets how much interest you pay over the life of the loan. But it is one factor, not the whole picture. The monthly payment is mostly that rate plus your property taxes and insurance. Useful, but still not the full story.

Then there is cash to close, and this is where it gets murky. Cash to close bundles in a lot of separate costs: origination fees, points, and your escrows and prepaids. The catch is that on a loan estimate, there is no accuracy requirement for those escrow and prepaid numbers. One lender can lowball them so their cash to close looks smaller, then correct them later. And no matter which lender you choose, your escrows and prepaids end up the same anyway, because they are based on your property taxes and insurance, which no lender controls.

So cash to close is a bad number to shop on. Here is what actually tells you something.

Sections A through D: the real cost of the loan

Loan estimates break costs into lettered sections. A through D are the loan costs, meaning what it actually costs to do the loan.

Section A is origination and points. Every lender charges something to do the loan, and that fee lives here. If you buy points, paying money upfront to lower your rate, that shows up in Section A too. For more info on points, read How Mortgage Points Work.

Section B is fees you cannot shop for. Credit report, appraisal, flood certification, and other required items. You do not pick these vendors.

Section C is fees you can shop for. Lender's title insurance and attorney fees. Still required, but you have some say.

Section D is the total. A plus B plus C. This is the number that tells you what the loan actually costs you. When you weigh one lender against another, Section D minus any lender credits is the figure that matters, not cash to close.

The costs that aren't really loan costs

Sections F and G are your escrows and prepaids. Escrow is basically a savings account your lender opens and you pay into it monthly, and they use that money to cover your taxes and insurance. Prepaids are the same kind of cost, just due at closing, like your first year of homeowners insurance on a purchase.

These are not costs of the loan. They are costs of owning the home. You would pay them no matter who you borrow from.

Sections E and H are similar. Section E is usually recording fees, small charges to record the loan with your county. Section H, on a purchase, is your owner's title insurance. That one is optional but worth it, because it protects you if a problem with the home's title ever surfaces. It is different from the lender's title insurance back in Section C, which is required and protects the lender, not you.

The three numbers to actually compare

Forget shopping on one number. To compare loan estimates apples to apples, look at three together:

1. The note rate
2. The loan costs, meaning Section D minus any lender credits, not cash to close
3. The loan amount

Why all three? Because of a move some lenders make. Loan costs can be folded into the loan amount itself. A lender bumps your loan amount up a little to absorb some of those costs, then shows you the same rate with a lower cash to close, and it looks like a better deal. What you do not notice is that you are now paying interest on a bigger balance.

Put the rate, the Section D loan costs minus any lender credits, and the loan amount side by side, and the real best deal becomes obvious.

If you have two or three estimates in hand, the Quote Comparison calculator does this side by side for you. Drop in each rate, points, and loan costs, and it shows the true cost of each.

Bottom line

Loan estimates are built to help you pick the best deal, but only if you know what to look for. Once you know that Section D minus any lender credits is the real cost of the loan, that escrows and prepaids are the same no matter who you choose, and that you compare rate, loan costs, and loan amount together, the document works the way it is supposed to. You can look past the numbers lenders hope you stop at and see which offer is actually best.

If you are buying or refinancing in North Carolina and want a second set of eyes on your loan estimates, reach out. Happy to walk through them with you.