The closing disclosure is a crucial document in any real estate transaction. It provides a detailed summary of all the costs and terms associated with the mortgage, helping both buyers and sellers understand the financial aspects of the deal before finalizing it. Whether you are a first-time homebuyer or an experienced real estate investor, understanding the closing disclosure is key to ensuring there are no surprises on closing day. In this guide, we’ll break down the different sections of the closing disclosure and explain what each part means.
What Is a Closing Disclosure?
A closing disclosure (CD) is a five-page document that provides a comprehensive overview of the costs, fees, and terms of a mortgage loan. It is required by law and must be provided to the buyer at least three business days before closing on a home. This mandatory waiting period gives the buyer time to review the details, compare them to the initial loan estimate, and address any discrepancies before signing the final documents.
- Required by Law: The closing disclosure is required by the TILA-RESPA Integrated Disclosure (TRID) rule, which aims to provide greater transparency in real estate transactions.
- Final Numbers: The closing disclosure includes the final loan terms, interest rate, monthly payments, and all closing costs, ensuring that there are no surprises when it’s time to sign.
Key Sections of the Closing Disclosure
The closing disclosure consists of several key sections, each of which provides important information about your loan and the overall transaction. Understanding these sections will help you make an informed decision about your purchase.
1. Loan Terms
The Loan Terms section is found on the first page of the closing disclosure and provides a snapshot of the main components of your mortgage.
- Loan Amount: The total amount you are borrowing from the lender.
- Interest Rate: The interest rate on your loan, which affects your monthly payments and the overall cost of the mortgage.
- Monthly Principal & Interest: The portion of your monthly payment that goes toward paying down the loan and covering interest costs.
- Prepayment Penalty: Indicates whether there is a prepayment penalty if you pay off your loan early.
- Balloon Payment: States if there is a balloon payment, which is a large payment due at the end of the loan term.
2. Projected Payments
The Projected Payments section provides a breakdown of your estimated monthly payments over the life of the loan.
- Principal & Interest: Shows how much of your monthly payment will go toward paying off the loan principal and interest.
- Mortgage Insurance: If you are required to have private mortgage insurance (PMI), this section will show how much you need to pay each month.
- Estimated Escrow: This includes payments for property taxes, homeowners insurance, and any other items held in escrow.
- Total Monthly Payment: The total estimated monthly payment, including principal, interest, mortgage insurance, and escrow payments.
3. Closing Costs
The Closing Costs section provides a summary of the fees and charges associated with your mortgage.
- Loan Costs: This includes origination fees, application fees, and other charges related to processing the loan.
- Other Costs: This section may include taxes, government fees, prepaid items, and other third-party charges.
- Cash to Close: This shows the total amount of money you need to bring to the closing table, which includes the down payment, closing costs, and any other payments.
4. Loan Costs Breakdown
On the second page of the closing disclosure, you’ll find a detailed breakdown of all loan costs. This includes origination charges, services that you cannot shop for (such as an appraisal), and services that you can shop for (such as a title search).
- Origination Charges: Fees charged by the lender for processing the loan application, including underwriting fees.
- Services You Cannot Shop For: These include services that the lender requires and selects, such as a credit report or appraisal fee.
- Services You Can Shop For: These are services where you have the opportunity to choose the provider, such as title insurance or a pest inspection.
5. Other Costs Breakdown
The Other Costs section includes various fees and charges that are not directly related to the loan itself but are part of the overall closing costs.
- Taxes and Other Government Fees: Fees paid to the local government, such as recording fees.
- Prepaids: Costs that need to be paid in advance, such as property taxes, homeowners insurance, and mortgage insurance.
- Initial Escrow Payment: An amount collected upfront to set up your escrow account for property taxes and insurance.
- Title and Closing Fees: Fees related to the title search, title insurance, and any costs associated with the closing process.
6. Calculating Cash to Close
The Calculating Cash to Close section helps you determine how much money you need to bring to closing. This section compares the final numbers from the loan estimate you received at the start of the mortgage process to the actual costs in the closing disclosure.
- Total Closing Costs: This includes all costs associated with obtaining the loan.
- Down Payment/Funds from Borrower: The amount of money you are contributing toward the purchase.
- Deposit: If you have made an earnest money deposit, this amount will be subtracted from the cash to close.
- Seller Credits: If the seller has agreed to contribute toward your closing costs, this amount will be reflected here.
7. Loan Disclosures
The Loan Disclosures section provides important information about the legal and financial obligations of the loan.
- Assumption: Indicates whether the loan can be transferred to a new borrower if you sell the home.
- Demand Feature: States whether the lender can require early repayment of the loan.
- Late Payment: Details what happens if you make a late payment, including any fees that may be charged.
- Negative Amortization: Indicates whether the loan allows for negative amortization, where the loan balance could increase even if you make all payments on time.
8. Escrow Account Details
The Escrow Account section provides information about whether the lender will manage an escrow account for property taxes and homeowners insurance.
- Escrow Items: Lists the items that will be included in the escrow account, such as property taxes and homeowners insurance.
- Escrow Payment: Shows the estimated monthly amount that will be paid into the escrow account.
- No Escrow: If you choose not to have an escrow account, you will be responsible for paying property taxes and insurance directly when they are due.
Reviewing and Comparing the Closing Disclosure
One of the main purposes of the closing disclosure is to allow you to compare the final loan terms to those in your initial loan estimate. Pay close attention to any changes and ensure you understand why they occurred.
- Interest Rate Changes: If the interest rate is different from the one in your loan estimate, ask your lender to explain why.
- Increased Fees: Review any fees that have increased since the loan estimate and ask for clarification.
- Total Cash to Close: Verify that the cash to close amount is accurate and that you have enough funds available for closing day.
Tips for Navigating the Closing Disclosure
1. Review Carefully
Carefully review the closing disclosure as soon as you receive it. You have three days to go over the document, so take your time to understand each section and ensure everything is accurate.
2. Ask Questions
If anything on the closing disclosure is unclear or seems incorrect, ask questions. Your lender, real estate agent, or attorney can help you understand the document and make any necessary corrections.
3. Compare to the Loan Estimate
Use the initial loan estimate as a reference point to compare the closing disclosure. Look for significant differences and understand why those changes occurred.
Conclusion
The closing disclosure is a critical document that provides transparency in the home buying process, outlining all the costs and terms associated with your mortgage loan. By understanding the different sections of the closing disclosure, reviewing it carefully, and asking questions, you can ensure that there are no surprises on closing day. Being informed and proactive will help you navigate the process confidently and make the best financial decisions for your future home.
