Reading a Loan Estimate: points, credits and what is actually comparable

Every mortgage applicant receives a Loan Estimate, in a standard format, so that two lenders can be compared line by line. It works, on one condition: the quotes have to be from the same day, because pricing moves. Page one gives the loan amount, rate, monthly payment and whether any of them can change, plus the estimated cash to close. Page two breaks the costs into what is paid to the lender, what is paid to third parties, and prepaid items like taxes and insurance — which are not a cost of borrowing at all, they are money the borrower would owe anyway, so they should not be used to judge which lender is cheaper. The number that actually compares lenders is the origination charges section plus any discount points, against the rate obtained. Points are the mechanism everyone half-knows. Paying a point buys a lower rate; a lender credit does the reverse, raising the rate to cover costs. Neither is better in the abstract. The question is the break-even: how many months of the lower payment it takes to recover the points, against how long the borrower will actually keep the loan. Someone likely to move or refinance within a few years should rarely buy points. Page three has the APR and the total interest percentage, which fold the costs into the rate and are the closest thing to a single comparable figure. Ask for the Loan Estimate rather than a verbal quote. A lender reluctant to produce one has told you something. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com