Should You Compare Prepaids and Escrows When Shopping Mortgage Lenders?
Short Answer:
Yes, you should avoid comparing escrow and prepaid numbers on a loan estimate between different lenders.
Longer Answer:
When you’re shopping for a mortgage, it’s natural to want the best deal. Many homebuyers wonder: When comparing different mortgage lenders, should I avoid comparing Prepaids and Escrows? The answer is yes—and here’s why.
What Are Prepaids and Escrows?
Prepaids and Escrows are costs collected at closing to cover items like homeowner’s insurance, property taxes, and prepaid interest. These are not lender fees; they are costs you’d pay regardless of which lender you choose. The amounts can vary based on the time of year, your insurance provider, and your local tax rates—not the lender.
Why You Shouldn’t Compare Prepaids and Escrows
When you compare Prepaids and Escrows between lenders, you’re not comparing the actual cost of the loan. These amounts are determined by third parties and local government requirements, not by the lender. Focusing on these numbers can be misleading and may distract you from the real differences in lender costs. Lenders can use different amounts for homeowner's insurance and real estate taxes throwing off the cash needed for closing.
Where to Focus: Sections A and B of the Loan Estimate
To accurately compare mortgage offers, you must focus on the fees in Sections A and B of the Loan Estimate:
- Section A: Origination Charges
This section lists the lender’s own fees, such as application fees, underwriting fees, and points. These are the true costs set by the lender and are the most important for comparison. - Section B: Services You Cannot Shop For
These are fees for services required by the lender, such as credit reports and appraisals. While you can’t shop for these, they are set by the lender and can vary between lenders.
What About Section C? (Services You Can Shop For)
In most states, the buyer gets to choose the settlement or title company. This means the fees in Section C (“Services You Can Shop For”) should be the same, regardless of the lender you choose. If you see differences, it’s likely because the lender is using a different provider in their estimate, but you have the right to select your own.
What About Section E: Taxes and Other Government Fees?
Section E of the Loan Estimate covers “Taxes and Other Government Fees.” These include charges such as recording fees and transfer taxes, which are set by your local or state government. Like Prepaids and Escrows, these fees are not controlled by the lender and will be the same no matter which lender you choose. They are based on your property location, sales price of your property and the applicable government rates.
The Bottom Line
When shopping for a mortgage, you must compare lender fees in Sections A and B of the Loan Estimate—not Taxes, Other Government Fees, Prepaids and Escrows. Prepaids and Escrows are not controlled by the lender and will be similar no matter which lender you choose. By focusing on the right sections, you’ll get a true apples-to-apples comparison and make the best financial decision for your home purchase.
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.
Find more answers to mortgage & real estate questions at www.jdanswersquestions.com
DMV mortgage OH Mortgage
