Ask the Expert: How to read a mortgage loan estimate

When applying for a mortgage, one-and-done is not your best approach. You stand to save money if you shop around for the best loan for you, and this means you should know how to decipher the documents that come your way.

A mortgage loan estimate is a three-page form you receive after applying for a mortgage. A lender must provide you with a mortgage loan estimate within three business days of receiving your application — however, be aware that they have not yet approved or denied your loan application.

The form shows you what terms the lender expects to offer if you move forward. If you do move forward with your mortgage application, the lender will ask you for additional financial information. The document includes the estimated interest rate, monthly payment, and total closing costs, as well as information about the estimated costs of taxes and insurance.

It will also indicate whether the loan includes things like a prepayment penalty (for paying the loan off early) or whether the balance could increase even if payments are made on time (negative amortization).

Here are some components to which you should pay close attention:

* Check loan term, purpose, product, and loan type: Located near the top of the form, this information spells out the number of years (term), the purpose of the loan (i.e. purchase), product (such as fixed or variable rate), and loan type (i.e. Conventional, FHA, VA).

* Rate lock. Check whether the rate is locked or whether it can change between now and your closing.

* Prepayment penalty. Note whether the loan includes a penalty for paying it off early. This can cost you thousands.

* Balloon payment. A balloon payment is often considered risky. It’s a large one-time payment made at the end of the loan term. This type of loan usually includes lower payments during the life of the loan, but you need to be financially prepared to make that large payment at the end.

* Estimated monthly payment and estimated taxes, insurance, and assessments. Make sure everything adds up to a number you can pay. Sometimes taxes, insurance, and assessments are held in escrow for you. If not, make sure you have a plan to pay these bills when they arise, because they can be large lump-sum amounts.

* Estimated cash to close. This is cash you’ll need on hand at closing.