It’s finally time. You sit down with the closing agent or title agent and start signing a large stack of papers to make that house your own. One of the forms you will sign is the closing disclosure form. It’s one of the most important documents in the closing process, as it contains all of the details about the loan you’ve agreed to take on.
Why does the closing disclosure matter?
The closing disclosure form, which is five pages long, is required for all home loans obtained on or after Oct. 3, 2015. This document is given to the homebuyer at least three business days before the closing, which gives the buyer time to look through it and ask questions about the mortgage. The disclosure locks in the information, and that’s why it is important to make sure everything is accurate.
This document replaces the HUD-1 Settlement Statement, which was a bit more complicated. Also, the homebuyer sometimes did not get the HUD-1 statement until the closing.
How much is the homebuyer borrowing?
The first document of the closing disclosure form outlines the specifics of how much the homebuyer is borrowing for the purchase. It is shown in the “loan amount” box. That number is generally the purchase price of the home, minus the down payment. If the closing costs are rolled into the loan, it will also include that amount. Page 3 of the document includes a breakdown of what is included in the loan amount box.
The interest rate (or rates) for the life of the loan
The document also outlines the interest rate that the borrower will pay throughout the life of the loan, as well as whether it is a fixed-rate or adjustable-rate loan. This rate should not be a surprise to the homebuyer. If the rate was not locked in earlier, it may change up until the point of signing. If the rate is adjustable, the closing disclosure will note when interest rates or payments can change and any rate caps.
Breaking down the monthly payment
The disclosure also clarifies what the monthly payment is on the loan. This includes:
- The principal and interest payment, including how much it will change over the life of the loan.
- The amount of private mortgage insurance, or PMI, for those who do not pay down at least 20 percent on the loan.
- Estimated escrow costs, which may include taxes and home insurance, depending on whether the homebuyer elects for the lender to collect those.
The cost of the mortgage
One of the most important disclosures of the document is the breakdown of what the loan will cost the borrower. The closing disclosure form outlines all fees related to the loan. This can include fees paid to the lender, recording fees, title-transfer fees and others. In addition, any prepaid interest and insurance premiums may be outlined.
What else to look for in the closure disclosure form
The closure disclosure form will break down any points that the homebuyer will pay at closing. It will outline exactly how much money the homebuyer needs to take to the closing table. This information is very detailed to ensure that there is no question about the cost of borrowing the money to buy the home.
If the borrower has a question about the closing disclosure form, he should contact the lender directly. Once the closing disclosure form is understood and the buyer agrees to all the terms, he can sign the documents with confidence and leave the closing table with house keys in hand.
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