If you’re purchasing a new home or refinancing your current one, it’s imperative that you understand all the terms of your loan before you cross on the dotted line. Keep in mind that once you sign, you’re committing to the conditions presented, regardless of whether there are any mistakes in the paperwork.
It’s crucial that you carefully read the Closing Disclosure your lender sends you. As one of the final forms you receive before you close on your new loan, the Closing Disclosure will list the terms and costs associated with your mortgage, allowing you to compare them to those listed in the Loan Estimate form you were given at the beginning of the process.
Like all mortgage forms, the Closing Disclosure can be overwhelming to review, especially if you’re not sure what to look out for. Instead of glossing over what you don’t understand, read this article to learn about everything the form covers. That way, you’ll have no doubts when you’re asked to sign.
What Is A Closing Disclosure?
The Closing Disclosure is a five-page form that describes, in detail, the critical aspects of your mortgage loan, including purchase price, loan fees, interest rate, real estate taxes, 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 during the home buying process.
What Is The Closing Disclosure 3-Day Rule?
Your lender is required by law to give you the standardized Closing Disclosure at least 3 days before closing. 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.
Closing Disclosure Form Basics
We’ve broken down each component of the Closing Disclosure below.
This section of the disclosure statement lays out all of 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 amount you plan to borrow after you subtract the down payment. If this amount has increased from your Loan Estimate, you’ll want to find out why.
- Interest Rate: The interest rate is the fee you pay to your lender for borrowing money. Your interest rate is a percentage of the loan amount, 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 loan amount you’ll pay for each month. Note that if your monthly payment includes mortgage insurance or escrow payments, those will not be included here.
- Prepayment Penalty: This doesn’t apply to every mortgage, but it’s the fee you pay if you decide to pay off your mortgage early.
- Balloon Payment: Not every mortgage has a balloon payment, but you’ll want to take note if yours does. This is a larger-than-normal, 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.
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 is comprised of the principal and interest, mortgage insurance (if you don’t put 20% down) and the estimated escrow that’s used to pay your homeowners insurance and property taxes. This section shows you what all of those payments will be during the terms of your mortgage.
- 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 store 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.
- Estimated Taxes, Insurance And Assessments: Here, you’ll see certain fees that aren’t escrowed. You may choose not to escrow your taxes and insurance, and if so, they’re laid out in this section of the document. Items not in escrow may include property taxes, homeowners insurance and homeowners association dues. Be sure you budget for these costs throughout the year.
Costs At Closing
Closing costs are broken down even further in this section of the document to give you a clear picture of what you’ll pay to your lender during closing. Closing costs will typically be about 2% – 5% of your loan amount.
Included at the bottom of the itemized costs, you’ll find the cash to close amount, which is the full amount of money you’ll need to have on hand at closing. The amount listed will be higher than the sum of your total closing costs because it includes your down payment amount.
This portion of the Closing Disclosure is a comprehensive overview of the fees involved in getting your mortgage.
- Origination Fee: Typically, about 1% of the loan. This fee covers all of the administrative costs associated with your mortgage application, as well as the costs required to underwrite your loan. Together with mortgage points, this will be listed under Origination Charges on your Loan Estimate.
- Mortgage Points: If you’ve chosen to buy mortgage points, it’ll be reflected here. Points enable you to reduce the interest rate on your loan. One point equals 1% of the loan amount: For example, one point will cost you $2,000 if your loan is $200,000.
- Application Fee: The mortgage application fee covers the cost to process your application. The total amount varies by lender.
- Underwriting Fee: When a lender underwrites your loan, they take a look at your full financial picture to determine how risky you’d be to lend to. The underwriting fee is included in the loan costs.
- Services Borrower Did Not Shop For: This is a list of required services that the lender chose. It can include an appraisal fee, credit report fee, flood determination fee, tax monitoring fee and tax status research fee. Check to be sure that these fees match the fees listed on your Loan Estimate. The costs should also be similar, though they might have changed slightly.
- Services Borrower Did Shop For: These are the third-party services that you might have bargain-hunted on your own. They could include a pest inspection, survey and any title-related services (including title insurance, settlement agent and title search fees).
There are other costs that could be wrapped up in your mortgage, including taxes and government fees, prepaids, initial escrow payment at closing and more.
- Taxes And Other Government Fees: You’ll see recording fees here, which are the fees for legally entering the new deed and mortgage into the public records. They include transfer taxes, which are paid when a property changes hands or when a mortgage loan is made. City, county and possibly state taxes are also included.
- Prepaids: This section will tell you whether you need to put some money in escrow for certain items, whether it’s a homeowners insurance premium, a mortgage insurance premium, prepaid interest or property taxes.
- Initial Escrow Payment At Closing: Your initial escrow payment will include homeowners insurance, mortgage insurance and property taxes, and here, you’ll see the full amount you’ll need to pay at closing.
- Other: There may be other expenses you’ll need to pay at closing, including homeowners association fees, a home inspection fee, home warranty fee, real estate commissions and title insurance.
At the end of this section, all other costs are added together, so you get a comprehensive overview.
Calculating Cash To Close
Cash to close reflects the full amount you need to bring to closing and includes any deposits you’ve already paid to the seller. It will also include how much money, if any, the seller is planning to pay toward your closing costs – known as seller concessions. These are closing costs that you negotiate with the seller to pay.
Summaries Of Transactions
This section is a side-by-side view of the borrower’s and seller’s costs at closing. You’ll be able to see adjustments for any items that are paid by the seller in advance, including fees that the seller has already paid, such as taxes, homeowners association fees and assessments. It also allows you to see what’s due from the seller at closing (such as payoff amounts of all mortgages, closing costs, seller credits and more).
At the bottom of this section, there is a full breakdown of the amount due from the seller and the amount due to the seller at closing. Additionally, it displays what you owe and what you’ve already paid prior to closing.
The loan disclosure section will show more detailed information about the conditions of your loan. These disclosures include:
- Assumption: This section will tell you whether the loan is assumable, which simply means that the lender will allow you to take over a home from a seller with little to no change in terms, including the interest rate.
- Demand Feature: Whether your loan includes a demand feature will be indicated here. If your loan does have a demand feature, the lender can require you to immediately pay the entire loan balance (principal and interest) at any time.
- Late Payment: Making your payments on time is really important to remain in good standing with your lender. However, it’s good to know in advance whether your lender will impose a late payment fee and when it will incur.
- Negative Amortization: Negative amortization means that the loan does not fully mature. In other words, any interest payments not met throughout the term of the loan are added onto the original principal balance. This can be a risky feature because a negative amortization loan is never paid in full. For example, you may make partial interest payments during the first 5 – 10 years of the loan, and any remaining interest payments are added to the original principal balance of the loan.
- Partial Payments: Let’s say you can’t make a full mortgage payment during a particular month. This section will indicate whether the lender will accept partial payments. Depending on your lender’s conditions, your partial payment may be held in a separate account instead of being applied toward your loan, and you may also be charged a late fee until you make up your payment. It’s important to know what will happen if you cannot make a full payment.
- Security Interest: A security interest simply means that if you stop making payments or don’t fulfill your mortgage agreement, the lender can take your home and sell it to pay off the loan.
- Escrow Account: This part is a detailed overview that explains your escrow account (including whether you have one or not), the homeownership expenses included in the escrow account and how much you’ll be required to pay into escrow. If your Closing Disclosure doesn’t provide an escrow account overview, but you’d prefer to pay your property taxes and homeowners insurance every month, talk to your lender.
This section tells you how much your loan will cost you over the loan term. In other words, it’ll summarize all the payments you’ll make over the life of the loan, including finance charges, the amount financed and the annual percentage rate. It will also give you information about your total interest percentage.
In this section, you’ll find general information about the appraisal (if applicable), contract details, refinance information and tax deductions. All of this is just general information, though it will indicate in your loan whether the laws in your state will specifically protect you from liability for the unpaid balance after foreclosure.
Contact Information And Confirm Receipt
Finally, the last section includes the Contact Information and Signature lines. You’ll see the following: “By signing, you are only confirming that you have received this form. You do not have to accept this loan because you have signed or received this form.” In other words, signing the form does not require you to take the loan.
What Is A Loan Estimate?
The Loan Estimate is a three-page document you receive 3 days after applying for a mortgage. It provides a summary of the loan terms, the costs associated with the mortgage, the loan size, interest rate and payments. It lays out whether there are any balloon payments, prepayment penalties or more. The document also includes a schedule of your payments and the estimated taxes and insurance payments. Closing costs are outlined in the Loan Estimate as well.
The Closing Disclosure includes all the same information, but you can’t make any changes after you sign the Closing Disclosure. It’s important to compare your Closing Disclosure with your initial Loan Estimate to identify any discrepancies. If you notice any differences, including an increase in the mortgage interest rate or borrowing costs, you need to talk to your lender before you sign.
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Discrepancies Between Your Closing Disclosure And Loan Estimate
If you find a discrepancy between the Loan Estimate and the Closing Disclosure, the first step is to contact your lender or real estate agent immediately to correct the errors. These mistakes can be as minor as misspelled names or as serious as a change in the interest rate.
Alerting your lender to the errors may delay closing, but it’s vital to get any discrepancies cleared up before signing. If changes need to be made, you have 3 days prior to closing to review the revised Closing Disclosure. Once they’ve been fixed, compare the Loan Estimate and Closing Disclosure again to ensure that they match up.
The Closing Disclosure lists your final costs in a comprehensive overview – so you know what you’re responsible for paying at closing and throughout your loan term. The Closing Disclosure walks you through important aspects of your mortgage loan, including the purchase price, loan fees, interest rate, real estate taxes, closing costs and other expenses.
Your lender is required by federal law to give you the standardized Closing Disclosure at least 3 days prior to closing. It should look similar to the Loan Estimate. You’re required by law to receive the Loan Estimate 3 days after you submit a loan application.
Take the time to look over both your Loan Estimate and Closing Disclosure in detail to make sure everything you see makes sense. Note any discrepancies and bring them up with your lender.
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