How to read a closing disclosure

Whether you’re buying a new home or are looking to refinancing, before your mortgage becomes a binding agreement, you’ll receive what is called a closing disclosure. Your closing disclosure will include all the nitty-gritty details of your mortgage, from the borrowed amount to interest rates, closing and everything in between. You’ll want to read this document carefully before signing the dotted line.

Closing disclosures, and really any legal document, can be tricky to decode — especially if you’ve never read one. Fear not! Before getting overwhelmed and potentially missing crucial details of your loan, this article will break down each part of a closing disclosure. Still need help? You may want to hire a real estate professional to help go over any documents involved in buying or refinancing a home.

What is a closing disclosure?

A closing disclosure is the final document given to a borrower by their lender that encapsulates all details of their loan. This is what you’ll look over and sign to make your mortgage official. The form is usually about five pages long and has information about your purchase price, interest rate, fees, taxes, and all other terms and expenses. You are given three days to look over and sign your closing disclosure. This gives you time to correct any mistakes or items that don’t align with the original agreement. 

Decoding closuring disclosure terms

Understanding your closing disclosure is imperative. Reading and understanding the fine print will help avoid any discrepancies or unfair clauses. We’ve broken down each page of a closing disclosure, as well as some key terms to remember:

Page one: Loan term and projected payments

The loan term section discusses how long you’ll be paying off your loan and how much you’ll be paying each month. It’s broken down by the following terms:

• Loan amount: The amount of money you are borrowing from your lender, not including fees, interest and insurance premiums.
  
• Interest rate: Expressed as a percentage, your interest rate is the amount your lender charges for borrowing money. It is an annual amount that is dispersed throughout your monthly payments.
• Monthly payments (principal and interest): Your monthly payments will cover principal and interest. Principal is a portion of the borrowed amount you’ll pay each month while interest is the portion of your annual interest that you pay each month.
• Prepayment penalties: Any penalties your lender may charge for paying your mortgage off early.
• Balloon payments: Some mortgages are set up with lower monthly payments and one big payment at the end. This is called a balloon payment. Be careful to save up in preparation for this type of payment should it be a part of your loan terms.
• Projected payments: This section will show you what your payments will look like for the following months and years. You can see how the payments change, for example the ratio of principal and interest as you build equity.
• Closing costs: This is all the money you’ll owe when you close on your loan. This includes your down payment and other fees. Make sure this aligns with your loan estimate. 

Page two: Other loan costs

On page two, you’ll usually find other loan costs and a section called “services borrower didn’t shop for” and “services borrower did shop for.”

• Services borrower didn’t shop for: These are required services, like a credit report fee and an appraisal fee, that the lender selects for the borrower. You should’ve seen the same or similar services on your loan estimate.
• Services borrower did shop for: Any additional services you chose to add on to your loan, like title insurance and other items you’ve agreed to pay.
• Loan costs: You’ll see other costs and random fees broken down in this section as well, like your loan origination fee, application fee and mortgage points if you’ve chosen to buy them.

Page three: Closing

There aren’t many new terms to decode here, but page three will break down details about closing. It will include how much money you’ll need and any other fees or adjustments. Take a careful look at each item to make sure everything is correct and aligns with what you agreed on with the seller. 

Page four: Late fees and payments

The fourth page discusses late fees, partial payments and your escrow account.

• Late fees: the amount you’ll be charged for making a late payment.
  
• Partial payment: a partial payment is an amount less than what is owed. This section will discuss whether or not your lender allows for partial payments and what the implications are.
• Escrow account: your escrow account is a separate bank account for money that goes directly toward your mortgage payments. Most people put money in here for home insurance and taxes. Some lenders charge an opt-out fee if you decide not to open an escrow account.

Page five: Interest, foreclosure and refinancing

The final page of your loan disclosure will get into more detail about your interest, as well as what happens if your home goes into foreclosure, or you decide to refinance your mortgage.

• Annual percentage rate (APR): Your APR shows you the bigger picture of how much it costs to take out your loan and is usually higher than your interest rate. It includes your interest rate, in addition to broker fees, mortgage points and any additional money spent on your loan.
• Foreclosure: When you fail to make mortgage payments and the bank takes ownership of your home.
• Refinance: Revising or replacing the terms of your mortgage. Some homeowners do this to get a better interest rate or use their home equity to finance another house, renovate or pay off other debts. 

Does a closing disclosure mean your loan is approved?

No, a closing disclosure does not always mean your loan is approved. You may find incorrect information or something you want to change. Your lender also has the opportunity to back out if they find something new that makes them change their mind.

If all goes well and you sign and agree to the closing disclosure, the underwriter at your lender still needs to sign off. Once the lender signs the agreement, then all of the details you went over will be approved and binding.

What is the closing disclosure three-day rule?

As we mentioned earlier, the closing disclosure three-day rule means you have three days after receiving your closing disclosure to go over the terms and either sign or revise with your lender. Take advantage of these three days to go over each line item and all of the terms align close to the loan estimate. Using a real estate professional to help go over the closing disclosure is helpful.

Now that you’re armed and ready to take on your disclosure agreement, you should feel comfortable signing the dotted line once you’ve ensured that everything is in place.