Right now, about 9 in 10 home buyers in America pay too much for their mortgage. Without knowing it, people pay steep fees and higher rates than other people in the exact same financial circumstances.
Imagine two identical people want to buy the exact same house. They have the same credit score and income, debts, and everything else. Due to deceptive sales practices that are incredibly common (and used by the biggest lenders in America), one of these people might pay as much as $20,000 more than the other for the exact same loan. It’s bananas.
To help people get a fair deal, we wanted to expose some of the tricks and practices big lenders use to disguise or misrepresent the numbers that are in a Loan Estimate.
Let’s break down what’s in a Loan Estimate
When you look at a loan estimate, it can be a lot to take in, especially if it’s your first time. There are so many categories, and without experience or some real study, it’s hard for most buyers to feel confident distinguishing a good deal from a rip-off. Lenders know this and may take advantage by shifting costs and downplaying certain fees. Here’s what you should pay attention to…
Interest Rate
This matters, of course, but any lender anywhere can charge you more or less for a specific interest rate. It’s referred to as “buying points,” where there’s an upfront cost to get a specific rate. If you have $0 associated, that’s called a “par rate.” Sometimes it’s a good idea to buy points—if you don’t plan to move or refinance in the next 5 years, such as when interest rates are especially low. But points aren’t always a good idea, financially. Our research shows that while a majority of buyers get points, very few know what they are or even whether they’re a good investment. So while it’s tempting to look at the interest rate at face value, remember that it’s not the whole story. For that, you need to take a trip to Section A.
Section A
Loan points: This section is key for comparing lenders. It details what you’re paying to get the interest rate shown. You may have chosen to buy points to lower your rate, which would show as a fee here. Alternatively, you could have opted for lender credits (increasing your rate) to offset upfront closing costs, appearing as a credit here.
Origination fees: What you likely didn’t choose are the origination fees (sometimes called underwriting or processing fees) listed below the points charge. Most lenders charge thousands in these fees as a “thank you” for choosing them.
Here are three examples of that fee worded differently.
We don’t mean to brag (too much), but here at Tomo Mortgage, we think this fee is unfair and, frankly, highway robbery. That’s why the origination or underwriting fee will always be $0 on your loan estimate from us–as it should be.
Cost at closing
Many lenders emphasize just the interest rate or out-of-pocket closing costs—it seems logical, right? But these aren’t the only important numbers, and how your lender calculates “cash to close” matters a lot. Unfortunately, this number can often be manipulated to appear lower than what you’ll actually pay at closing.
Many lenders underestimate costs in sections E, F, and G of the LE, which cover taxes, insurance, and escrow. The number is a guess, right? But many people are surprised to find $10,000 extra added to the closing costs when they’re ready to close, because the lender decided to lowball the numbers to make their overall fees seem less significant (these are fees that are in their control, after all).
Here’s how they do it:
Escrow and prepaid costs: Some lenders might list fewer months of escrow for taxes or insurance than you’ll actually need, leading to extra charges later. For example, they might list only three months of escrow for taxes when six months is typical.
Notice that in the first Loan Estimate, property taxes are included for 4 months, whereas for the second Loan Estimate, property taxes are noted for 9 months (in section G).
Additionally, in the first Loan Estimate homeowner’s insurance is estimated for 3 months vs. the second
Title costs and third-party fees (Section C): Some lenders underestimate title and third-party costs to make their offer appear lower. When actual (higher) costs come in, they may blame it on third-party vendors, saying, “that’s not us; it’s the title company’s cost that came in high” or “you and your agent must have chosen an expensive title company.”
Earnest money deposit: If your purchase agreement isn’t finalized, lenders might omit the earnest money from the loan estimate. This can make the closing cost estimate seem artificially low, only to rise later on.
When things don’t add up
At closing, it’s all too common to hear lenders say, “that was just an estimate” if costs turn out higher than expected. In reality, these estimates were often intentionally understated to keep clients progressing down the mortgage process until it’s too late to switch—by then, clients may have too many sunk costs, like a home inspection, appraisal, title, and earnest money deposit.
And if you haven’t done it before, this is where they get you
The truth is, most people only go through the mortgage process once or twice in their lifetime (I mean, how many of us are getting so many mortgages that we become experts?). It’s complex, and lenders know that the unfamiliarity and inaccessibility of these details give them an advantage. Many often rely on this knowledge gap to manipulate costs, turning what should be a straightforward process into a maze of fees and hidden charges.
That’s why it’s crucial to know how to read each section of the loan estimate and understand how costs might change—so you’re not caught off guard or locked into an expensive loan.
Transparency should be the standard, not the exception
Unfortunately, not every lender is forthcoming about what you’ll really pay and whether their loan is really a good deal. Honesty and transparency can be really hard to find.
We’re working to change all that, one loan estimate at a time.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
