When comparing mortgage offers, it is easy to focus on the interest rate or monthly payment. Those figures are important, but they may not show how much each loan could cost during the first several years.
The five-year cost of borrowing gives you another way to compare mortgage offers. It helps you understand how much of the money paid during the first five years goes toward borrowing costs rather than reducing the loan balance.
You can find the information needed to calculate this amount on page 3 of a lender’s Loan Estimate.
Mortgage Easy App can help you explore estimated payments, interest, amortization, and the remaining loan balance before you apply. Once you receive official Loan Estimates, you can compare those documents with your Mortgage Easy App results and examine the five-year cost shown by each lender.
What Is a Loan Estimate?
A Loan Estimate is a standardized document that provides important information about a mortgage you have requested.
It generally includes:
- The loan amount
- Interest rate
- Monthly principal-and-interest payment
- Estimated total monthly payment
- Mortgage insurance
- Estimated taxes and insurance
- Loan costs
- Other closing costs
- Estimated cash needed at closing
- APR
- Total Interest Percentage
- Five-year comparison information
- Other important loan features
The Loan Estimate is generally three pages long. The five-year comparison information appears on page 3 under the Comparisons section.
The document is called an estimate because certain costs and loan details may change before closing. You should compare the final terms on the Closing Disclosure with the terms originally presented on the Loan Estimate.
What Does the “In 5 Years” Section Show?
The “In 5 Years” section presents two separate dollar amounts.
The first amount shows the estimated total you will have paid during the first five years in:
- Principal
- Interest
- Mortgage insurance, if applicable
- Loan costs
The second amount shows how much of the mortgage principal you will have paid off during those five years.
These numbers are related, but they do not mean the same thing.
The first number includes principal repayment and borrowing costs. The second number isolates the amount that reduced your loan balance.
According to the Consumer Financial Protection Bureau, subtracting the second number from the first gives you the estimated interest and fees paid during the first five years. This result is called the five-year cost of borrowing.
The Five-Year Cost-of-Borrowing Formula
The basic calculation is:
Total paid during the first five years − Principal paid off during the first five years = Five-year cost of borrowing
For example, suppose the “In 5 Years” section of a Loan Estimate shows:
- Total paid in five years: $61,290
- Principal paid off in five years: $19,105
The calculation would be:
$61,290 − $19,105 = $42,185
The estimated five-year cost of borrowing would be $42,185.
This amount represents the estimated interest, mortgage insurance, and applicable loan costs paid during that period. It does not represent the amount by which you reduced the loan balance.
Why Principal Repaid Is Not a Borrowing Cost
Principal is the amount you borrowed from the lender.
When part of your payment is applied to principal, that money reduces your outstanding mortgage balance. It is repayment of the money borrowed rather than a fee charged for borrowing it.
Suppose you make $61,290 in qualifying payments and costs during the first five years, but $19,105 reduces your principal balance.
The $19,105 is not part of the five-year borrowing cost because it reduces the amount you owe.
The remaining $42,185 represents the estimated cost associated with using the lender’s money during that period, including applicable interest, mortgage insurance, and loan costs.
This is why adding principal repayment to interest and calling the result the borrowing cost would be incorrect.
A Practical Five-Year Example
Consider a simplified mortgage with the following terms:
- Loan amount: $200,000
- Loan term: 30 years
- Interest rate: 4% fixed
- Estimated monthly principal and interest: approximately $954.83
- Example loan costs: $4,000
- Mortgage insurance: none in this simplified example
Over the first 60 scheduled payments, the borrower would pay approximately:
- Principal and interest: $57,290
- Principal paid off: $19,105
- Interest paid: $38,185
- Example loan costs: $4,000
The first figure in the Loan Estimate’s five-year comparison would be approximately:
$57,290 in principal and interest + $4,000 in loan costs = $61,290
The second figure would show approximately:
$19,105 in principal paid off
The five-year cost of borrowing would therefore be:
$61,290 − $19,105 = $42,185
The same result can also be understood as:
$38,185 in interest + $4,000 in loan costs = $42,185
These figures are simplified and rounded for educational purposes. An actual Loan Estimate may include mortgage insurance and different loan costs.
How the Loan Changes During the First Five Years
With a typical fixed-rate mortgage, the scheduled principal-and-interest payment generally remains the same. However, the way each payment is divided changes over time.
During the earlier years:
- A larger portion of the payment generally goes toward interest.
- A smaller portion reduces the principal.
- The loan balance decreases more slowly.
As the mortgage progresses:
- The interest portion generally decreases.
- More of each payment is applied to principal.
- The outstanding balance begins to decrease more quickly.
In the example above, the borrower makes approximately $57,290 in principal-and-interest payments during five years. However, only approximately $19,105 reduces the principal.
The remaining amount is primarily interest.
Mortgage Easy App’s amortization schedule helps illustrate this relationship by showing how payments may be distributed between principal and interest and how the remaining loan balance may change over time.
What Is Included in the Five-Year Total?
The official Loan Estimate form states that the first five-year figure includes:
- Principal
- Interest
- Mortgage insurance
- Loan costs
The second figure shows the principal paid off.
The official Loan Estimate form presents these amounts as comparison measures that can be used when reviewing different loan offers.
Because mortgage insurance and loan costs can vary between offers, two mortgages with similar interest rates may have different five-year borrowing costs.
What Is Not Included?
The five-year comparison is not the same as the complete cost of owning the home for five years.
The figure does not generally include every expense associated with homeownership, such as:
- Property taxes
- Homeowners insurance
- HOA fees
- Maintenance
- Repairs
- Utilities
- Renovations
- Moving expenses
- Furnishings
- Special assessments
- Other personal homeownership costs
These expenses still affect affordability even though they are not part of the Loan Estimate’s five-year borrowing-cost calculation.
Mortgage Easy App includes applicable property taxes, homeowners insurance, PMI, and HOA fees in the estimated total monthly housing payment. This gives you a broader affordability view than the five-year borrowing-cost calculation alone.
Five-Year Cost Is Different From Total Payments
The phrase total of payments has a separate meaning on mortgage disclosures.
The total of payments shown on the Closing Disclosure represents the total amount you are scheduled to pay over the entire life of the mortgage. It generally includes principal, interest, mortgage insurance, and loan costs, assuming you make every payment as agreed and keep the mortgage for its full term.
The five-year comparison covers only the first five years.
Therefore:
- Five-year total paid covers principal, interest, mortgage insurance, and loan costs during the first five years.
- Five-year principal paid off shows how much the loan balance is estimated to decrease during that period.
- Five-year cost of borrowing is the difference between those two figures.
- Total of payments covers the scheduled amount paid over the entire mortgage term.
These figures should not be used interchangeably.
Five-Year Cost Is Different From APR
APR, or annual percentage rate, expresses certain borrowing costs as an annualized percentage.
It generally reflects:
- The interest rate
- Discount points
- Mortgage-broker fees
- Certain origination charges
- Certain mortgage-insurance costs
- Other applicable finance charges
APR helps you compare the broader cost of mortgage offers as a rate.
The five-year cost of borrowing expresses certain costs as a dollar amount over five years.
In simple terms:
- APR answers: What do certain borrowing costs look like when expressed as an annualized rate?
- Five-year borrowing cost answers: How many dollars may I spend on interest and applicable fees during the first five years?
Reviewing both figures can provide a more complete comparison.
Five-Year Cost Is Different From TIP
The Total Interest Percentage, or TIP, shows the total scheduled interest over the entire mortgage term as a percentage of the loan amount.
For example, if the total scheduled interest is $150,000 on a $200,000 mortgage, the TIP would be:
$150,000 ÷ $200,000 × 100 = 75%
TIP assumes that you make all scheduled payments and keep the mortgage for its full term. The CFPB explains that TIP is most useful when comparing different Loan Estimates.
The five-year cost is different because it focuses only on the first five years and may include interest, mortgage insurance, and loan costs.
Why the Five-Year Cost Matters
Many buyers will not keep the same mortgage for the entire 15-year or 30-year term.
A borrower may:
- Sell the home
- Move to another property
- Refinance
- Pay off the loan early
- Replace the mortgage with another loan
If you expect to sell or refinance within several years, the full-term cost may not be the only useful comparison.
The five-year cost helps you evaluate how expensive the loan may be during an earlier ownership period.
For example, one lender may offer a lower interest rate but charge substantial discount points. Another lender may offer a slightly higher rate with fewer upfront loan costs.
The first loan could cost less over 30 years but more during the first five years if the upfront costs are not recovered before you sell or refinance.
Comparing Two Loan Estimates
Suppose two lenders provide Loan Estimates for the same loan amount, loan type, and term.
Loan A
- Total paid in five years: $102,000
- Principal paid off: $21,000
- Five-year cost of borrowing: $81,000
Calculation:
$102,000 − $21,000 = $81,000
Loan B
- Total paid in five years: $100,500
- Principal paid off: $22,500
- Five-year cost of borrowing: $78,000
Calculation:
$100,500 − $22,500 = $78,000
Loan B has an estimated five-year borrowing cost that is $3,000 lower.
That does not automatically make Loan B the best choice. You should also compare:
- Interest rate
- APR
- Monthly principal and interest
- Mortgage insurance
- Total monthly payment
- Closing costs
- Cash needed at closing
- Rate-lock status
- Fixed or adjustable rate
- Prepayment penalties
- Balloon payments
- Lender service and reliability
- Expected time in the home
The five-year cost is one comparison tool rather than a complete lending decision.
Compare Similar Loans
The five-year cost is most useful when you compare loans with similar features.
Try to compare offers with the same or similar:
- Loan amount
- Loan type
- Loan term
- Down payment
- Rate structure
- Mortgage-insurance arrangement
- Rate-lock period
- Property information
Comparing a 15-year fixed-rate mortgage with a 30-year adjustable-rate mortgage may not provide a clear result because the payment structure, term, and future risks are different.
The CFPB recommends comparing the same type of loan with the same features so the differences between lenders are easier to understand.
How Discount Points Affect the Five-Year Cost
Discount points are upfront fees paid to the lender in exchange for a lower interest rate.
Paying points may:
- Increase your upfront loan costs
- Reduce the interest rate
- Lower the monthly principal-and-interest payment
- Reduce interest paid over time
- Increase the time needed to recover your upfront expense
Because loan costs are included in the first five-year figure, paying points can increase the five-year cost even when the lower rate reduces your monthly payment.
Whether paying points is worthwhile may depend on how long you expect to keep the mortgage.
If you sell or refinance before the monthly savings recover the cost of the points, the lower rate may not produce the expected benefit.
Adjustable-Rate Mortgages Require Extra Care
An adjustable-rate mortgage, or ARM, can make the five-year comparison more complicated.
The CFPB explains that the five-year cost shown for an ARM assumes the interest rate remains the same. If the rate increases, the actual borrowing cost could be higher.
When reviewing an ARM, examine:
- The initial interest rate
- How long the initial rate lasts
- The date of the first adjustment
- How frequently the rate may adjust
- The index and margin
- Periodic adjustment limits
- The maximum possible interest rate
- The maximum possible payment
- Whether the five-year period includes a possible rate adjustment
A low initial rate should not be evaluated without considering how the payment could change.
How Mortgage Easy Helps You Estimate the First Five Years
Mortgage Easy is not a lender and does not issue an official Loan Estimate. However, it can help you understand the numbers before and after you receive lender offers.
After you enter information such as the home price, down payment, loan amount, interest rate, APR, loan term, taxes, insurance, PMI, HOA fees, income, debt, state, and city, Mortgage Easy provides several connected results.
Monthly Payment Estimate
Mortgage Easy App estimates applicable monthly expenses such as:
- Principal and interest
- Property taxes
- Homeowners insurance
- PMI
- HOA fees
This helps you understand the broader monthly housing expense.
Amortization Schedule
The amortization schedule shows how scheduled payments may be divided between principal and interest.
By reviewing the first 60 payments, you can estimate:
- Total principal paid during five years
- Total interest paid during five years
- Remaining loan balance after five years
- How quickly equity may build through scheduled payments
Total Interest and Loan Cost
Mortgage Easy App estimates the interest and total payments associated with the mortgage over the selected term.
These figures help you compare the first five years with the mortgage’s longer-term financial effect.
Affordability Analysis
A loan may have a competitive five-year cost but still require a monthly payment that is too high for your budget.
Mortgage Easy App compares your income, monthly debts, and estimated housing expenses to help you consider whether the proposed payment appears manageable.
Deal-Quality Analysis
Mortgage Easy App’s deal-quality analysis helps identify parts of the proposed financing that may need closer attention, such as:
- Interest rate
- APR
- Closing costs
- Monthly payment
- Total interest
- Down payment
- Affordability ratios
Once you receive an official Loan Estimate, use its figures when comparing lender offers.
Mortgage Easy App and the Official Loan Estimate Serve Different Purposes
Mortgage Easy App provides educational estimates based on the information you enter.
A lender’s Loan Estimate provides standardized information about a specific mortgage offer.
You can use Mortgage Easy App to:
- Explore possible home prices
- Estimate monthly payments
- Test different interest rates
- Compare loan terms
- Review amortization
- Estimate affordability
- Prepare questions for lenders
You should use the official Loan Estimate to:
- Confirm the lender’s proposed rate
- Review mortgage insurance
- Examine loan costs
- Calculate the official five-year borrowing cost
- Compare lender offers
- Review cash needed at closing
- Identify unusual loan features
- Confirm whether the rate is locked
Mortgage Easy App can help you understand the concepts, but the lender’s document controls the terms of the actual offer.
Questions to Ask the Lender
When reviewing the five-year comparison, consider asking:
- Which charges are included in the five-year total?
- How much principal will I pay off in five years?
- How much interest will I pay during that period?
- Does the calculation include mortgage insurance?
- Am I paying discount points?
- How much do the points cost?
- How long would it take to recover the cost of the points?
- Is the interest rate fixed or adjustable?
- Is the rate locked?
- Could the payment change during the first five years?
- Are lender credits increasing my interest rate?
- Does the loan include a prepayment penalty?
- Can you provide an option with lower upfront loan costs?
- Can you provide another Loan Estimate without points?
These questions can help you understand why two offers have different five-year costs.
Important Limitations
The five-year cost of borrowing is an estimate based on the terms shown on the Loan Estimate.
Your actual cost may differ if:
- The loan terms change before closing
- The interest rate is not locked
- You receive a revised Loan Estimate
- The mortgage has an adjustable rate
- Mortgage-insurance costs change
- You make additional principal payments
- You miss or delay payments
- You refinance
- You sell the home
- You pay off the mortgage early
- Final loan costs differ from the original estimate
Before closing, review the Closing Disclosure and compare it with the Loan Estimate. Ask the lender to explain any unexpected changes.
Final Thoughts
The five-year cost of borrowing is not simply the total amount of mortgage payments made during the first five years.
The Loan Estimate provides two figures:
- The total paid in principal, interest, mortgage insurance, and loan costs during five years
- The amount of principal paid off during five years
Subtracting the principal paid off from the total paid gives you the estimated five-year cost of borrowing.
The formula is:
Five-year total paid − Five-year principal paid off = Five-year cost of borrowing
This calculation helps separate the money that reduces your loan balance from the interest, mortgage insurance, and applicable loan costs paid to obtain and maintain the mortgage.
Mortgage Easy App helps you prepare for this comparison by showing estimated monthly payments, affordability, total interest, loan cost, amortization, and the remaining balance over time.
Use Mortgage Easy App to explore different scenarios before applying. Once lenders provide official Loan Estimates, compare the five-year costs alongside the interest rate, APR, monthly payment, closing costs, cash needed at closing, and other loan terms.
The lowest monthly payment is not always the least expensive option. Understanding what you may pay during the first five years can help you choose a mortgage that better fits both your immediate budget and your homeownership plans.