Closing Disclosure: What it is and how to read the form

When you get a mortgage to buy a home, one of the most important documents you’ll receive is the Closing Disclosure. This form details your final loan terms, your interest rate, your projected monthly payments, and your exact closing costs. Here, we’ll break down how you to read your Closing Disclosure so you can fully understand the terms of your mortgage and the costs involved.

Key takeaways:

• A Closing Disclosure (CD) is a standardized five-page form that outlines the final terms and costs of your mortgage.
• Your lender provides this document to you at least 3 business days before your scheduled closing date so you have time to review it.
• Compare your final Closing Disclosure to your initial Loan Estimate to ensure your interest rate, fees, and total cash to close have not changed significantly.

What is a Closing Disclosure?

A Closing Disclosure (CD) is a five-page document provided by your mortgage lender shortly before you finalize your home purchase. This document details your final mortgage terms, your interest rate, projected monthly payments, and an itemized list of all your closing costs. Every lender must use the exact same standardized Closing Disclosure form format to make it easy for home buyers to fully understand the costs of their mortgage.

Why understanding your Closing Disclosure matters

If you’re purchasing a new home or refinancing your current loan¹, it’s imperative that you understand all the terms of your loan before you sign on the dotted line and commit to those conditions. Before you close on your new loan, the Closing Disclosure gives you an opportunity to compare your loan terms and costs to the terms listed in the Loan Estimate form you received at the beginning of the process.

The Closing Disclosure can be intimidating at first, especially if you’re not sure what to look out for. Take time to review everything the form covers so you’ll know exactly what you’re committing to and what you’ll owe. Your real estate agent can help you review your Closing Disclosure and identify common errors.

When do you receive a Closing Disclosure?

Lenders are required to provide you with your Closing Disclosure at least 3 days before you close on the loan. That way, borrowers have time to carefully review the form, compare the figures to their Loan Estimate, ask the lender any questions, and report any errors.

What is the Closing Disclosure 3-day rule?

The Closing Disclosure 3-day rule refers to the federal law that requires lenders to give you your Closing Disclosure at least 3 days in advance of your closing date. This mandatory review period gives you ample time to read the document, consult with your real estate agent, and ask your lender questions without feeling rushed. This requirement is thanks to the TILA-RESPA Integrated Disclosures guidelines, which went into effect on October 3, 2015.

What changes restart the 3-day waiting period?

If your lender makes certain changes to your loan terms during the 3-day window, they must issue a brand-new, revised disclosure, which will immediately restart the 3-business-day waiting period. These major changes include:

• Your annual percentage rate (APR) increases by more than 0.125% for fixed-rate loans, or 0.25% for adjustable-rate loans.
• The addition of a prepayment penalty.
• A major change in the loan product itself – for example, shifting your financing from a fixed-rate loan to an adjustable-rate loan.

How does this rule affect the closing timeline?

The Closing Disclosure is typically issued only after your underwriting is finished and all final costs from the title company and seller have been carefully calculated. Because of the 3-day rule, any major revisions or corrections you request can push back your time to close on a house. However, minor clerical corrections - such as fixing a typo in your address - do not require a new waiting period and will not delay your closing.

How to read a Closing Disclosure

Every lender uses the same standardized Closing Disclosure form. Let's break down the document page by page so you know exactly what you’re looking at and where to find key information.

Page 1: Loan terms and projected payments

The first section of the disclosure statement lays out the terms of your mortgage, including how much you’ll pay and for how long.

Loan terms

The Loan terms section is 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 paid annually as interest for borrowing money that’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 when borrowers pay off their mortgage early.
• Balloon payment: This is a one-time payment that’s 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

The Project Payments section of the Closing Disclosure breaks down the major components of your mortgage loan and shows you 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. This section shows you what all of those payments will be during the terms of your mortgage. If your mortgage payment can change – like with 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.
• Estimated taxes, insurance, and homeowners association assessments: You may choose not to escrow your taxes, HOA dues, and insurance. If so, they’re laid out in this section of the document.

Costs at closing

The final section shows you your costs at closing, which is what you’ll owe upfront. Costs at closing will include your down payment plus closing costs, which can be 3% – 6% of your loan amount. To provide a clear picture, the costs are itemized and accounted for.

Page 2: Loan costs and other costs

The second page of your Closing Disclosure breaks down and itemizes all the different costs that make up your closing costs.

Loan costs

This portion of the Closing Disclosure is a comprehensive overview of the fees involved in getting your mortgage.

• Origination fee: Typically, this is anywhere from 0.5% – 1% of the loan amount. The origination fee covers all the administrative costs associated with your mortgage application.
• Mortgage points: If you’re buying mortgage points, it’ll be reflected here. Points 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. Mortgage points, along with the origination fee, are listed on the Closing Disclosure under Origination Charges.
• 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 are 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 a home appraisal  fee, credit report fee, flood determination fee, tax monitoring fee, and tax status research fee.
• Services borrower did shop for: These are the third-party services like a pest inspection, survey, and any title-related services.

Other costs

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 that 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 how much money you need to put in escrow for certain prepaid costs, 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.
• Other: There may be other expenses you’ll need to pay, including none or any of the following: HOA fees, a home inspection fee, a home warranty fee, real estate agent commissions, and title insurance.

At the end of this section, all other costs are added together, so you get a comprehensive overview.

Page 3: Calculating cash to close and summaries of transactions

Page three compares the cash to close figures from your Loan Estimate with the final figures on your Closing Disclosure to help you identify any changes. It also shows you which costs are paid for by the buyer and which are covered by the seller.

Calculating cash to close

Cash to close reflects the full amount you need to bring to closing and any deposits you’ve already paid to the seller. It will 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 due at closing. It shows you what’s due from both parties at closing, such as payoff amounts of all mortgages, closing costs, seller credits, and more.

Page 4: Loan disclosures

The fourth page of the Closing Disclosure gives further details about the terms of your loan.

Loan disclosures

The loan disclosure section details the conditions applicable to your mortgage.

• Assumption: This section will tell you whether the loan is assumable, meaning that the loan can be transferred to another person with little to no change in terms, including the interest rate.
• Demand feature: A demand feature on a Closing Disclosure indicates that the lender can demand, for any reason and at any time, full repayment before the loan term ends. Most mortgage agreements do not have a demand feature. If this box is checked you can ask to have it removed or even pull out of the mortgage agreement.
• Late payment: Your lender will tell you what your late fees and penalties are. Reviewing this section is critical to remain in good standing with your lender and credit bureaus.
• 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 to the original principal balance.
• Partial payments: This section will indicate whether the loan allows for partial payments. Your partial payment may be held in a separate account instead of being applied toward your loan and you may be charged a late fee until you make your 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, the homeownership expenses included in the account, and how much you’ll be required to pay into it. If your Closing Disclosure doesn’t provide this overview, and you’d prefer to have your lender pay your property taxes and homeowners insurance every month using an escrow account, talk to your lender.

Page 5: Loan calculations, other disclosures, and contact information

The final page summarizes the total costs of your loan and includes additional disclosures and contact information.

Loan calculations

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 (APR).

Other disclosures

In this section, you’ll find general information about the appraisal, 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.

Closing Disclosure checklist: What to review before signing

To avoid unexpected fees or delays on closing day, refer to this checklist to verify the most important items before you sign.

• Cash to close: This is the exact amount you must bring to your closing meeting via a certified cashier’s check or secure wire transfer. Make sure it matches the figure on the Loan Estimate.
• Loan terms: Verify your interest rate and your specific loan type. Ensure there are absolutely no surprise prepayment penalties or sudden balloon payments listed on Page 1.
• Personal information and property address: Check the spelling of your legal name and your co-borrower's name, and ensure the property address is entirely correct. A minor typo here is easy to fix but can cause administrative headaches if left uncorrected.
• Fees, credits, and seller concessions: Compare your final closing costs against your last Loan Estimate. Ensure that any negotiated seller credits or lender credits have been properly and accurately applied to lower your final cash to close amount

Discrepancies between your Closing Disclosure and Loan Estimate

The Loan Estimate is a three-page document you receive 3 business days after applying for a mortgage. It provides a summary of the estimated loan terms, the costs associated with the mortgage, the loan size, interest rate, and payments. It’s important to compare your Closing Disclosure with your initial Loan Estimate to identify any discrepancies.

If you find a discrepancy between the Loan Estimate and the Closing Disclosure that you don’t understand, contact your lender or real estate agent immediately. 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 change the time it takes to close, but it’s vital to get any discrepancies cleared up before signing. If changes need to be made, you have 3 additional business days prior to closing to review the revised Closing Disclosure. Once the changes have been fixed, compare the Loan Estimate and Closing Disclosure again to ensure that they match up.

Do you have to accept the loan after signing the Closing Disclosure?

No, signing the Closing Disclosure signifies that you’ve reviewed the mortgage information sent by your lender. If you change your mind about purchasing a property after signing the Closing Disclosure, you can still opt out.

It’s important to note that there can be financial and credit consequences to backing out at the last second. You may have to pay for things like application fees and the appraisal to compensate the lender for services performed, and you’ll likely lose your earnest money deposit. Also, there’s a minor negative credit impact associated with applying for any loan. This small ding to your credit bounces back within a few months.

What happens after you receive the Closing Disclosure?

Once you receive and review the document, you will officially acknowledge receipt - often via e-signature - to start your 3-day clock. During this waiting period, you should finalize your preparations for closing day. You will execute a final walk-through of the property to ensure it is in the agreed-upon condition, secure your cashier's check for your cash to close, and prepare to meet with the notary or title agent to sign your final closing documents.

Closing Disclosure PDF and sample form

Here’s a sample Closing Disclosure PDF from the Consumer Financial Protection Bureau to give you an example of what a Closing Disclosure form would look like for a $162,000 loan with a 3.875% interest rate.

FAQ

Here are the answers to some frequently asked questions about Closing Disclosures.

What is the purpose of a Closing Disclosure?

The Closing Disclosure is designed to give the final, locked-in mortgage terms and exact closing costs they will face, so that they fully understand the financial commitment before closing day.

Does receiving a Closing Disclosure mean the loan is approved?

The loan is approved prior to a lender issuing a Closing Disclosure. However, you’ll want to make sure your credit, income, and debt are in check during this time frame until the transaction is finalized.

Does a Closing Disclosure mean underwriting is done?

Yes. Your lender cannot accurately generate your final closing costs and exact interest rate until the underwriter has fully reviewed your financial profile, verified your assets, and cleared your file.

Does a Closing Disclosure mean clear to close?

Yes, receiving your Closing Disclosure is typically the final step that immediately follows your lender issuing a "clear to close" status. Clear to close means the lender is ready to fund the loan, and the CD is the document proving it.

Who gets a copy of the Closing Disclosure?

Typically, buyers and lenders will receive a copy of the Closing Disclosure. It’s recommended that buyers share a copy of their Closing Disclosure with their real estate agent to review before signing.

The bottom line: Get familiar with your closing documents

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. It 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. Take the time to look over both your Loan Estimate and Closing Disclosure in detail to make sure everything matches up.

Are you ready to get started with the home loan process? Apply for a mortgage with our team of Home Loan Experts today. 

¹Refinancing may increase finance charges over the life of the loan.

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