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Why Loan Estimate is a better way to compare mortgages than just APR

What is a Loan Estimate?

A Loan Estimate is the key document that mortgage brokers and lenders are required to issue upon receiving the following six key pieces of information from borrowers, constituting a mortgage application:

  1. Consumer’s Name,
  2. Income of Consumers, 
  3. Consumer’s Social Security number to obtain a credit report,
  4. Property Address, 
  5. An estimate of the value of the property, and 
  6. Mortgage loan amount sought.

See this sample loan estimate for reference.

What is an APR?

A mortgage’s “Interest Rate” is the cost a borrower will pay each year to borrow the mortgage, expressed as a percentage rate. It does not reflect fees or other charges the borrower would need to pay for the mortgage. 

APR on the other hand, refers to Annual Percentage Rate, a measure of the cost of borrowing money, including points, mortgage broker fees and other charges that the borrower pays to get the mortgage. Therefore, a mortgage’s APR is usually higher than the interest rate.

Why it’s important to insist for a Loan Estimate?

The TILA-RESPA Integrated Disclosure (TRID) rule sets tolerances on fees that a lender can charge and have permissible variance from a loan estimate. 

Specifically, there are three categories of fee tolerance thresholds: 

  1. Zero tolerance; 
  2. Limited cumulative tolerance and 
  3. No or unlimited tolerance, as explained below:

Zero Tolerance Fees

Fees that are paid to the creditor, the mortgage broker or an affiliate of either party have zero tolerance. Any origination fees charged to borrowers will fall under this category. 

Similarly, fees paid to unaffiliated service providers for services that the consumer cannot shop for has zero tolerance. 

There is zero tolerance in settlement service fees for which the borrower is not allowed to shop for that fee.

Finally, transfer taxes on mortgages are also considered to have zero tolerances, as their schedules are often readily accessible and corresponding amounts don’t vary significantly day-to-day. 

Limited Tolerance Fees

Fees subject to the limited cumulative tolerance threshold include mortgage recording fees.

Recording fees are assessed by state and local government authorities for recording the loan documents. Note that unlike transfer taxes, recording fees are not based on the loan amount or purchase price of the property, rather often based on number of pages recorded.

Furthermore, limited cumulative tolerance category also includes fees for required third-party services when the consumer is permitted to shop for the provider and the consumer picks a provider from the loan originator’s Written List of Settlement Service Providers.

By selecting a settlement service provider from loan originator’s List of Service Provider, the consumer has not shopped for the service and the fee for this service would be disclosed on the closing disclosure as a fee the consumer did not shop for.

No or Unlimited Tolerance Fees

Finally, the “No” or “Unlimited” Tolerance category refers to settlement charges that have no tolerance limits. Fees subject to No/Unlimited Tolerance category can increase by any amount but still needs to be disclosed in the loan estimate based on the most accurate information available at the time of loan estimate.

No/Unlimited Tolerance fee include prepaid interest, hazard insurance premiums, initial escrow payments, inspections and owner’s title insurance policy – not required by the lender.

If the consumer selects a settlement service provider that wasn’t in mortgage originator’s Written List of Settlement Service Providers, for that settlement service, the fee becomes No or Unlimited Tolerance.

Why is a Loan Estimate potentially better way to compare mortgage options than APR alone?

APR does not help you review itemized breakdown of your mortgage closing costs. A Loan Estimate on the other hand, itemizes closing cost estimates in a standardized fashion. 

There are services you can actually shop for. You can save substantially by going for a cost effective settlement service provider.

While APR attempts to summarize the closing costs itemized in the Loan Estimate, a thorough apples-to-apples comparison of Loan Estimate provided by one lender with another is far more effective in comparing mortgage offers, and shopping for your list of settlement services provider that best help you save more.

If you would like to learn more about APR and Loan Estimate, feel free to reach out to Stem Lending’s Loan Officers by contacting us here.

Wishing happy home buying and savings on your mortgage!

Sample Loan Estimate

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