Within three business days of submitting a mortgage application, your lender must give you a Loan Estimate — a standardized three-page document that itemizes every significant aspect of your proposed loan. Understanding how to read it can help you compare lenders accurately, spot red flags, and avoid surprises at closing.
Page 1: The Big Picture
Loan Terms
The top of page 1 shows your loan amount, interest rate, monthly principal and interest payment, and whether any of these can change. Key things to check:
- Loan Amount: Confirm this is correct — it affects every other number on the page
- Interest Rate: Is this a rate lock, or can it change before closing?
- Prepayment Penalty: Most California mortgages don’t have these, but verify
- Balloon Payment: Should be “NO” for most borrowers
Projected Payments
This section breaks down your total estimated monthly payment: principal and interest, mortgage insurance (if applicable), and estimated taxes and insurance. This is your actual anticipated monthly out-of-pocket payment — make sure you can comfortably afford this amount.
Costs at Closing
Page 1 shows two key numbers: Closing Costs and Cash to Close. Closing costs are all the fees to complete the transaction. Cash to Close is the total you’ll need to bring to the closing table — including your down payment, closing costs, and prepaid items, minus any deposits already paid.
Page 2: Closing Cost Details
This is the most important page for comparison shopping. It breaks costs into sections:
Section A: Origination Charges
These are the lender’s fees — origination points, underwriting fees, application fees. This is where you’ll see how much the lender is charging you directly. A legitimate wholesale broker typically charges lower origination fees than retail lenders because they’re compensated by the lender rather than primarily by borrower fees.
Sections B & C: Services You Can and Cannot Shop
Title insurance, settlement services, appraisal, and other third-party costs. In California, you can shop for your own title company and escrow service. The Loan Estimate must include reasonable estimates — but these are estimates, not guaranteed prices until you receive a Closing Disclosure.
Section E: Taxes and Other Government Fees
Recording fees and transfer taxes. In California, county transfer taxes apply to purchases (sellers typically pay in CA, but verify in your contract).
Section F: Prepaids
Homeowner’s insurance premium, mortgage interest from closing to end of month, and property tax escrow setup. These aren’t “fees” — they’re your actual costs for insurance and taxes, collected in advance.
Section G: Initial Escrow Payment at Closing
California lenders typically require 2-3 months of property taxes and insurance be deposited into escrow at closing. On a $1.5 million California home, this can be $4,000-$7,000.
Page 3: Comparisons and Other Considerations
Page 3 shows the APR (Annual Percentage Rate) — a more comprehensive cost measure than the interest rate alone — and total payments over the life of the loan. The “In 5 Years” row shows your total payments and how much equity you’ll build in the first five years, useful for break-even analysis on a purchase vs. continue renting decision.
Using the Loan Estimate to Compare Lenders
When comparing Loan Estimates from different lenders, focus on: the interest rate, Section A origination charges, total closing costs, and APR. Be cautious of lenders who show low rates but high origination fees — the APR will expose this tradeoff.
Questions about your Loan Estimate? Contact DiVita Home Finance — we’re happy to walk you through every line and explain what you’re looking at.
