Comparing Loan Disclosures from Different Loan Lenders
Scenario: “We’re planning to buy a home in Michigan soon and talked to several lenders. Each of them gave us worksheets showing breakdowns of loan charges, interest rates, and payments. The rates vary, some of the worksheets show large origination fees, and the charges for insurance/taxes/title fees vary too. How can we know which option is best?”
Welcome to the wonderful world of loan disclosures! As you’ve seen, there’s a LOT of assumptions involved here, particularly if you don’t have a specific property in mind. Let’s see if we can clarify things:
The Difference Between Loan Worksheets and Loan Estimates
First and foremost, there’s two types of documents involved here.
“Loan worksheets” are often the first item loan officers provide prospective clients. While the format may vary, the goal is to itemize the probable terms of a loan. Note that these are NOT binding on lenders, they simply represent an informal breakdown of loan details. The costs listed may (or may NOT!) be exact.
The second, formally binding cost breakdown, is referred to as a “Loan Estimate” or “LE”. LE’s ARE binding on lenders to some extent, but how binding depends on which cost. A cost the lender controls (such as an underwriting fee) cannot change from what is stated on the LE. These charges are called “zero tolerance items.” Costs not controlled by the lender (title fees, appraisal charges, other third-party costs) may not be exact, but can’t rise by more than 10% on the final Closing Disclosure without a valid “changed circumstance”. Changed circumstances include a different loan size, purchase price, or property type. An LE based on a single-family home for a property that is later determined to be a condo would have a valid changed circumstance. Lastly, some items listed on LE’s (insurance costs, property taxes, HOA charges) are not binding, and can change without penalty to the lender.
Are Loan Worksheets and Loan Estimates Accurate?
Loan worksheets are helpful IF the loan officer producing them is diligent and accurate. LE’s are more accurate yet still not 100% precise.
Since lenders are bound by the “0% and 10% tolerance” portion of LE’s, they may err on the side of caution, listing 3rd party costs higher than expected. There’s no penalty for doing so. Bottom line, if you’re comparing LE’s from different lenders, variations in third party fees typically don’t matter. The appraiser/title company/recorders office/etc set their costs, not lenders. Your homeowners’ insurance premium will be whatever it is, regardless of the lender you opt for.
How to Compare Rates and Origination Costs
“I get that some costs shown may be estimates, but there’s different rates and origination/discount costs. How do I compare those?”
Now we’re getting to the important stuff! The first thing to remember is that the rate shown on a Loan Estimate (and the cost or credit for that rate) on an unlocked loan is subject to change. Just because one lender shows a lower rate is meaningless unless you’ve got an accepted contract, closing date, and are ready to lock your loan.
It’s also critical to remember that lenders don’t have “a rate” on any given day. There’s always a range of rates available, with different costs (or credits) for a given rate. The lowest rate ISN’T necessarily the “best loan”! Let’s use a 200K loan size as an example:
Lender A might show a rate of 7.0%, with a discount cost of 2% ($4000) which you’d pay at closing, in addition to your down payment and other closing costs. Your monthly payment (excluding escrows) on that loan would be $1330.
Lender B might show 7.5% for their rate, with no discount cost. The monthly payment (again, excluding escrows) would be $1398, so $68/month higher than Lender A.
The question to answer here is whether you’re willing to pay $4000 at closing to save $68/mn over the life of the loan. It would take 58 months (just under 5 years) to recoup your $4000 cost on Lender A’s loan. If you live in the home for 10 years and never refinance, you’ll save $68/mn starting on month 59. If, however, you move or refinance prior to 59 months, you won’t recoup your $4000 cost for the rate (and don’t get a refund on any portion of it). Essentially, you’re betting on how long you’ll stay in the home and whether you’ll ever refinance.
If you’re using most of your liquid funds for your down payment and a $4000 charge to obtain the 7% rate would drain your savings, you’d almost certainly be better off with the slightly higher payment at 7.5%.
You’re also limiting your opportunities to refinance if/when rates fall when you opt for a lower rate/higher cost loan. When interest rates are elevated (as they currently are), it’s more likely they’ll fall enough to make refinancing a viable option than if they’re at multi-decade lows (as during Covid-19 pandemic). Paying $4000 for a lower rate on a loan you might refinance soon isn’t necessarily an ideal use of your capital.
Bottom line: As we’ve discussed before, your loan officer is your best resource for the “which rate/cost option is best for me” conversation. If you’re comparing lenders, ask for quotes without discount points for a true “apples to apples” comparison. Once you’re under contract and ready to lock your rate, ask the lender you’re planning to work with for rate options.
Caveat: Always keep in mind that SERVICE is the biggest factor to consider when choosing a lender. If you can’t reach your loan officer, or if he’s unable to answer your questions and offer pertinent advice, a slightly lower rate is less important!
Our Experienced Loan Officers Are Here to Support You
Our veteran loan officers and support staff want you to understand your mortgage approval, avoid surprises during the homebuying process, and ensure you don’t lose sleep wondering whether your loan will close as planned. It’s far more fun to concentrate on picking out furniture and blinds for your new home (without incurring new debt prior to closing!) rather than stress about your mortgage!