How to Understand Your Loan Estimate and Make the Right Choice

When you’re shopping for a mortgage, the first thing many people look at is the interest rate. But focusing on just the rate can lead you down the wrong path. There’s a lot more to the deal than a low number on a loan estimate, and if you don’t know how to read it, you might be missing out on what you're really paying for.

I’m here to help you navigate the ins and outs of your loan estimate, break down the key points, and show you how to make a smarter decision when choosing a lender.

Why It's More Than Just the Rate

When you're under contract, you’ll receive a loan estimate. This official document gives you all the details you need to understand your mortgage costs, including your interest rate, the amount of your loan, and your monthly payments. But what matters most isn’t just the rate; it’s what’s in the fine print, like your APR and fees, that can affect the true cost of the loan.

The loan estimate is broken into sections:

• The first page includes key details like your interest rate, loan amount, and monthly payment. It also shows the total amount due at closing, including down payment and closing costs.

  
  

• The second page breaks down the different fees. It separates those that the lender controls, the title fees, and costs tied to your escrow account, which helps pay your property taxes and insurance.

  
  

Breaking Down Loan Estimates

It’s important to understand how fees and rates affect the total cost. Let’s say you have two loan options. One with a 6.99% interest rate and the other with a 6.625% rate. Seems like the second option is better, right? But when you factor in the APR, which includes fees, you may see a bigger picture.

APR takes the interest rate and adds up the fees you’ll pay over the life of the loan. This gives you a more accurate idea of what the loan will cost you. While one loan might look cheaper up front, higher fees could make it more expensive in the long run.

Pro Tip: Always compare the APR, not just the interest rate. The APR gives you a clearer picture of what you’ll pay overall.

Watch Out for Manipulated Numbers

Some lenders may quote lower taxes or insurance fees to make a quote seem more attractive. But these numbers aren’t always accurate. For example, imagine a lender quotes $200 for property taxes when they should be $350, or $75 for insurance instead of $150. A lower payment looks appealing, but it’s not realistic. Be sure the numbers are correct so you’re not misled into thinking you’re getting a better deal.

The Fees You Need to Focus On

Your loan estimate will show several types of fees:

• Origination fees: Charged by the lender to process your loan.

  
  

• Discount points: Paid upfront to lower your interest rate.

  
  

• Title fees: Costs associated with the closing process, which you pay to the title company or attorney handling the transaction.

  
  

It's important to compare these fees across different estimates. A lender may offer no origination fee but charge you extra in discount points. Or, they might have a lower rate but higher fees elsewhere. All of this adds up.

Pro Tip: Don’t just focus on no origination fees. If discount points are high, it could cost you more at closing.

Prepaid Costs and Escrow

At closing, you'll also pay for prepaid items, such as a portion of your property taxes and homeowners insurance. The lender sets up an escrow account to hold these funds. They’ll collect a few months’ worth of payments upfront so that when these bills come due, the money is already in the account.

Pro Tip: Understand how much is being prepaid for taxes and insurance, as these figures often change during the year.

Example: Two Loan Options, Different Costs

Let’s look at an example with two loan options:

• Option 1: 6.99% interest rate, $28,000 due at closing.

  
  

• Option 2: 6.625% interest rate, $32,500 due at closing.

  
  

You might think that Option 2, with the lower rate, is the better deal. But when you break it down—after factoring in higher fees for the lower rate—the savings aren’t as significant. If you’re saving only $95 a month but paying $4,500 more at closing, the “better” rate might not be worth it in the long run.

The Real Takeaway: It’s Not Just About the Rate

The lesson here is simple: choosing the lowest interest rate doesn’t always mean you’re getting the best deal. Always look at the bigger picture APR, fees, taxes, and insurance and make sure the loan estimate reflects the actual cost to you.

Before you make a decision, work with a lender who is upfront, transparent, and has your best interests in mind. Integrity and character matter when making such a big financial decision.

Rebecca Richardson, “The Mortgage Mentor,” is a nationally recognized mortgage advisor based in Charlotte, NC, lending in multiple states across the U.S. With over 20 years of experience, she helps buyers navigate home financing with confidence whether you're buying your first home, investing, or navigating a major life transition. Rebecca is especially known for her work with veterans, real estate investors, and clients with complex financial needs. As a top-producing loan officer and sought-after educator, she’s a trusted guide for buyers and real estate professionals nationwide.