Whenever you’re buying a home with a loan, understanding the terms of that loan can give you peace of mind and make the closing process a lot smoother. When you receive your Closing Disclosure from your lender, knowing how to review it can help you approach the closing day with assurance. A financial advisor can help you understand how much house you can afford or how to work investment properties into your financial portfolio.
What Is a Closing Disclosure?
A Closing Disclosure is a document defining the essential features of your mortgage loan. This five-page file contains the purchase price, loan fees, closing costs, interest rate, projected real estate taxes and insurance.
Reading your Closing Disclosure front to back is important because it informs you of the terms you’re agreeing to. Therefore, knowing how much you’ll pay for your mortgage and how long the loan will last is key before legally binding yourself to the contract. In addition, looking through the Closing Disclosure enables you to see if the loan terms and expenses match what your lender gave you in the Loan Estimate form when you first began looking for a home.
Because of the unfamiliar language and format, a Closing Disclosure can be intimidating before you finish reading the first line. If you’re having trouble understanding the Closing Disclosure, it’s a good idea to ask your real estate agent for assistance.
Three-Day Rule for Closing Disclosures
Housing law mandates that your lender provide the Closing Disclosure at least three business days before closing. This regulation began on Oct. 3, 2015, and is called the Closing Disclosure three-day rule.
Before the three-day rule, you would have received multiple disclosure documents on closing that were tough to decipher, giving you no time to try to understand opaque, industry-specific language. Now, the rule gives you a minimum of three business days to peruse the closing disclosure. This period should be sufficient for you to understand what you’ll be committing to at the closing table.
The three-day rule has created a reliable pattern for lenders sending you a Closing Disclosure. Since the lender must wait three business days to close after giving you the Closing Disclosure, they have an incentive to make sure it is wholly accurate the first time. Therefore, the Closing Disclosure will contain accurate figures for all fees, the home appraisal and insurance costs. Once you understand the terms of your loan, the last step is to sign.
What’s Included in a Closing Disclosure?
Every Closing Disclosure contains the following sections to help buyers know what they agree to and to make sure both parties are on the same page.
The loan terms define what you’ll pay for the mortgage and for how long. Five sections comprise the loan terms, which are:
- Loan amount: Your down payment will reduce the amount that you borrow from your lender. The loan amount will also account for any extra fees and costs your lender rolls into your loan. If the number looks larger than you were expecting, it’s a good idea to follow up with your lender for clarity
- Interest rate: Interest is what you pay the lender for the money they lend you. You’ll pay the interest along with the rest of your mortgage each month. The interest rate from your Loan Estimate should be identical to your Closing Disclosure as long as you initially locked in the rate.
- Monthly principal and interest: This part defines how much of your mortgage payment goes toward the principal balance and the interest that accrues each month. You may notice that interest absorbs a large portion of your early payments, while years into the loan, your payments will increasingly knock down the principal.
- Prepayment penalty: Some lenders charge borrowers additional fees for paying off their mortgage in a few years rather than the 20 or 30 years defined in the paperwork.
- Balloon payment: Some mortgages stipulate a balloon payment in the final stretch of the loan. A balloon payment is a sum greater than one or two mortgage payments and can be financially ruinous to unprepared borrowers.
Your lender will show you how your loan payments will vary over time. Your monthly and yearly mortgage costs will shift, and your lender will break down your expenses with the following:
- Payment calculation: Your mortgage payment always pays for the principal and interest due for your loan. It’s possible that your payment also addresses your mortgage insurance, homeowners insurance and property taxes. This portion of the Closing Disclosure identifies your payment amount and how it will change over time.
- Estimated total monthly payment: Your lender bases your payment on your combined principal, interest, mortgage insurance and your escrow account containing your property taxes and homeowners insurance. If your mortgage doesn’t have an escrow account, you’ll pay for taxes and insurance separately.
- Estimated taxes, insurance and assessments: This section will display your taxes and insurance if you decide not to put them in escrow. To afford your mortgage, you’ll need to afford your monthly payment plus your taxes and insurance.
Closing and Loan Costs
On closing day, you’ll pay your lender closing costs for their services. Generally, closing costs are 3% to 6% of your loan amount. The Closing Disclosure will show what they are charging you for and the cash-to-close figure, which is the sum you must bring to the closing table.
Cash to close combines your down payment with your closing costs, letting you know exactly how much you’ll need to pay at closing. Closing costs include an origination fee, points, application and underwriting fees, additional lender services, taxes, government fees and escrow payments. Before closing it can be a good idea to calculate potential closing costs to help you prepare.
Summaries of Transactions
Here, you’ll get a comparison of the closing costs for the seller and borrower. The seller may have addressed certain costs already, such as association fees and taxes. This section will show any fees you and the seller owe upon closing.
Your loan disclosures are vital specifics about your mortgage. Reading through them, you’ll find the following:
- Assumption: This will indicate if you can hand your loan to someone else and preserve the loan terms.
- Demand feature: Your lender may or may not append a demand feature to the loan, meaning that no matter how far along you are in the loan, your lender can compel you to pay the total balance due.
- Late payment: This shows if your lender will charge you a fee for late-payments and what it considers late.
- Negative amortization: If your payments don’t cover the interest due, all unpaid interest will combine with the loan principal.
- Partial payments: In a particularly challenging month, your lender might accept a partial payment if you can’t come up with the amount due. It’s a good idea to understand how your lender will handle a situation where you can only make a partial payment.
- Security interest: This clause gives the lender to claim ownership of your home and sell it if you cease to make mortgage payments or fail to satisfy the terms of your loan in some way.
- Escrow account: This is a more thorough look at your escrow account and what you’ll owe for escrow. If you don’t have an escrow account, this section will let you know.
This part will total the monthly payments for your mortgage. The calculation accounts for the loan principal, all fees and interest.
Other disclosures include results from your appraisal, facts about your obligations, tax deductions and details about refinancing. One key fact to note here is whether your state’s laws will hold you responsible for any outstanding balance if a foreclosure occurs.
This part of the Closing Disclosure provides contact information for your lender, realtor and escrow company. After this information is the line for your signature. Your signature on the Closing Disclosure does not automatically bind you to the loan; however, once signed, the terms on the Closing Disclosure cannot change.
Compare Loan Estimate With Closing Disclosure
When you begin the home-buying process, your lender supplies you with a Loan Estimate three days after you submit your mortgage application. The Loan Estimate is three pages long and contains much of the information a Closing Disclosure does, including your loan terms, total balance, interest rate, estimated monthly payments and closing costs. When you’re reviewing your Closing Disclosure, it’s an excellent idea to have your Loan Estimate to compare.
If any figures don’t match, communicate with your lender and find out why. Your lender can fix any errors and mistakes on the Closing Disclosure as long as you have not signed it. It’s vital to do so, even though addressing discrepancies on the Closing Disclosure will postpone the closing. An interest rate increased by a fraction of a percent can cost you tens of thousands of dollars in the long run.
Once your lender sends you a revised Closing Disclosure, you’ll have three more business days to read it. As with your first review, check for mistakes and have your Loan Estimate at hand.
The Bottom Line
The Closing Disclosure lets you see how much you’ll pay for your mortgage, including monthly payments, interest and related fees for a real estate closing. Additionally, the document lays out key features such as escrow accounts and penalties for paying the mortgage off early. It’s recommended to examine the Closing Disclosure and compare it with your Loan Estimate to ensure you understand what your lender requires of you and to catch any errors, which could save you significant amounts of money.
Tips for Buying Real Estate
- Purchasing a home may be the most significant and important investment you’ll ever make. But you can run into pitfalls before calling your dream home truly yours. That’s why the guidance of a qualified financial advisor can be crucial for you and your family during this process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Knowing how much mortgage you can afford is key to assessing your Closing Disclosure and heading into the closing day with peace of mind. You can use our mortgage calculator to help you figure out what the amount you’re thinking about would look like.
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