Closing Disclosure: What It Is And How To Read The Form

The Closing Disclosure is a five-page form that describes the critical aspects of your mortgage loan, including purchase price, loan fees, interest rate, estimated real estate taxes, insurance, closing costs and other expenses. It’s important that you review it thoroughly – in fact, it’s one of the most important steps you can take while buying a house.

Why Understanding Your Closing Disclosure Matters

If you’re purchasing a new home or refinancing your current loan, it’s imperative that you understand all the terms of your loan before you sign on the dotted line. The reason for this is that once you sign, you’re committing to the conditions presented.

That means it’s crucial that you carefully read the Closing Disclosure your lender sends you once you're clear to close. As one of the final forms you receive before you close on your new loan, the Closing Disclosure allows you to compare your loan terms and costs to the terms listed in the Loan Estimate form you were given at the beginning of the process.

Like all mortgage forms, Closing Disclosures can be overwhelming to review, especially if you’re not sure what to look out for. Take the time to review everything the form covers so you’ll have no doubts when you’re asked to sign.

A good real estate agent can also help you review your Closing Disclosure and point out common errors. This is just one of the many reasons to always use a real estate agent when buying or selling a home.

What Is The Closing Disclosure 3-Day Rule

Your lender is required by law to give you the standardized Closing Disclosure at least 3 business days before closing. This is what is known as the Closing Disclosure 3-day rule. This requirement is thanks to the TILA-RESPA Integrated Disclosures guidelines, which went into effect on October 3, 2015.

Prior to these rules, home buyers received two documents: the HUD-1 Settlement Statement and the Truth in Lending Disclosure Statement (instead of the Closing Disclosure). There were two problems with these previous documents: they were confusing, and they were only provided at closing – which offered home buyers very little opportunity to review and make sense of them.

The Closing Disclosure’s 3-day rule now gives you plenty of time to go over the final terms of your loan before you sign your closing documents.

How Does The 3-Day Rule Affect The Closing Disclosure Timeline?

Because of the 3-day rule, the sequence of events leading up to you receiving a Closing Disclosure should be relatively predictable. Lenders are generally careful to avoid issuing a Closing Disclosure before they are certain about what the closing costs and fees will be; they don’t want to have to change the agreement and wait another 3 business days.

This means that loan approval, home appraisal, insurance and the calculation of all third-party fees will be completed before the Closing Disclosure is issued to you. The timeline will therefore look like this:

• All costs are calculated.
• The Closing Disclosure form is issued.
• The 3-day rule goes into effect.
• You sign the form.

Closing Disclosure Form Basics

We’ve broken down each component of the Closing Disclosure below.

Loan Term

This section of the disclosure statement lays out the terms of your mortgage. It provides an accurate snapshot of how much you’ll pay and for how long. It’s broken down into five parts:

• Loan amount: This is the total amount you plan to borrow after you subtract the down payment and add any fees or costs rolled into your loan. If this amount has increased from your Loan Estimate and you aren’t sure why, ask your lender.
• Interest rate: The interest rate is the fee you pay for borrowing money. Your interest rate represents a percentage of the loan amount that you pay annually as interest for borrowing money, and it’s included in your monthly mortgage payments. Your interest rate shouldn’t change from what’s on your Loan Estimate if you’ve locked in your rate.
• Monthly principal and interest: Here, you’ll see the interest and principal you’ll pay. Note that if your monthly payment includes mortgage insurance or escrow payments, those will not be included here.
• Prepayment penalty: Some lenders charge a prepayment penalty fee when borrowers pay off their mortgage early. This doesn’t apply to any mortgage with Rocket Mortgage^®.
• Balloon payment: This is a one-time payment that is due at the end of the loan. If you have a mortgage that requires a balloon payment, your payments are typically lower during the years leading up to when the one-time payment comes due. It can be risky because you may owe a large amount at the end of the loan. Rocket Mortgage doesn’t offer mortgages that have a balloon payment.

Projected Payments

This section of the Closing Disclosure breaks down the major components of your mortgage loan and displays how the payments change over the years. It gives you the best picture of what you owe on a month-to-month and year-to-year basis.

• Payment calculation: Your mortgage loan consists of the principal and interest, mortgage insurance (if applicable) and the estimated escrow that’s used to pay your homeowners insurance and property taxes (if you have one). This section shows you what all of those payments will be during the terms of your mortgage. If your mortgage payment can change (for example, an adjustable-rate mortgage), there will be a calculation for what your maximum payment can be at each change based on interest rate caps.
• Estimated total monthly payment: This is the amount you’ll pay each month, including the principal, interest, mortgage insurance and escrow amount. An escrow account is used by your lender as a way to pay your property tax bills and homeowners insurance premiums.

Not all mortgages have an escrow account, but if you’ve chosen to have one, your estimated monthly payments will show up here. If anything in this section is vastly different from what was stated in the Loan Estimate, ask your lender why. It's important to make sure that you can afford the estimated total monthly payments throughout the entire term of your mortgage.