Your guide to the Good Faith Estimate (© Pascal Broze/Getty Images)

© Pascal Broze/Getty Images

How much is this new loan going to cost me?

Most people naturally ask this when they borrow money to buy a house or when they refinance their mortgage.

An approximation of the final figure appears on the good-faith estimate, a three-page, government-mandated form that mortgage brokers and lenders must give prospective borrowers within three days of a loan application.

Here's a section-by-section dissection of the form.

Purpose and shopping for your loan
The top two sections on Page 1 show why the form is important. They are a summary of loan terms and estimated settlement charges, and borrowers can use them to shop and compare terms and charges that multiple lenders or mortgage brokers offer.

Important dates
This section discloses when the GFE expires and whether the interest rate is locked or floating, says Vicki Bott, a former assistant secretary for the Department of Housing and Urban Development.

"If the interest rate is floating, the terms of the GFE may only be available for a short period of time," she says in a HUD-produced video about the GFE. "If your interest rate is locked, you still must close your loan on or before that date for that interest rate to be effective."

Read:  Your guide to the HUD-1 settlement statement

Summary of your loan
This section discloses the initial loan amount, interest rate, monthly payment and loan term, says Kimberly Green, operations director at Quicken Loans in Detroit.

The payment includes principal, interest and mortgage insurance, if any, but not property taxes or homeowners insurance.

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The series of checkboxes spells out if the rate can rise, if the loan balance or payment can increase and if the loan has a prepayment penalty or balloon payment. If "yes" is checked on any box, further details should be disclosed.

"It's very cut and dried, so there are no surprises," Green says.

Escrow-account information
This section discloses whether the lender will collect a portion of the annual property taxes and homeowners-insurance premium each month in addition to the loan payment. If so, those amounts will be held in an escrow account and used to pay those expenses when they're due.

Summary of your settlement charges
The "A," "B" and "A+B" lines at the bottom of Page 1 show costs that are explained in detail on Page 2. "A" is the total of the lender's loan-origination charges. "B" is the total of fees for other settlement services. The costs could change before the loan closes.

Understanding your estimated settlement charges
he first two parts of this section disclose more information about the loan-origination charges and interest rate. If the first box in Part 2 is checked, Part 1 includes all the origination charges. If the second box is checked, the loan features a credit that reduces the charges and raises the interest rate. If the third box is checked, the loan includes points, which increase the charges and reduce the interest rate.

Parts 3 through 11 summarize the other closing costs, including:

  • Lender-required services — an appraisal, for example
  • Lender's title insurance
  • Owner's title insurance
  • Recording fees
  • Transfer taxes
  • Escrow-account deposit, if any
  • Prepaid interest
  • Homeowners insurance

Some of these charges can't change, others can increase no more than 10%, and others are unrestricted, allowing borrowers to select companies they prefer.

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"Certain fees are held to a 0% tolerance. If it increases by a penny, we have to cover that as a lender," Green says. "If it's a client-chosen fee that ends up being higher, the lender is not responsible for curing or covering that amount."

The chart at the top of Page 3 shows, in another format, which charges have zero tolerance, which have 10% tolerance and which can change.

The trade-off table
The table at the top of Page 3 helps borrowers weigh whether to pay higher closing costs to obtain a lower interest rate or to pay lower costs and accept a higher rate, Bott says in the HUD video. The choice, she says, is between paying higher closing costs now or paying more interest later.

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The shopping chart
The second table on Page 3 lets borrowers compare the terms and total estimated settlement charges of four loans side-by-side. The chart includes only the highlights of each loan, not all the details.