How to Use the Closing Disclosure for a Refinance
- Closing Disclosure Document Overivew
- Review our Closing Disclosure Example
- What Borrowers Should Know About the Closing Disclosure
- The Annual Percentage Rate (APR) increases by more than 1/8 of a percent for a fixed rate loan or 1/4 of a percent for adjustable loans. An increase in APR could be caused by an increase in interest rate or closing costs
- The loan product changes. For example, the borrower switches from a fixed rate mortgage to an adjustable rate mortgage
- A prepayment penalty is added. Adding a prepayment penalty at the end of the mortgage process is a red flag for borrowers
- How Borrowers Can Use the Closing Disclosure
- For a refinance, you can cancel your mortgage up to three business days after signing loan documents and then you are free to work with a different lender; however, we recommend that you do not sign your loan documents if you identify any significant issues or discrepancies. For a purchase mortgage you cannot cancel your mortgage after you sign loan documents.
- Page-By-Page Breakdown of Closing Disclsoure
- Page 1 of the Closing Disclsoure
- Summary information about the borrower and the mortgage
- Key loan terms such mortgage amount, interest rate and monthly principal and interest (P&I) payment
- Projected payment included taxes and insurance and if this payment can change over time
- Costs at closing which includes the final closing costs and cash to close figures
- Page 2 of the Closing Disclosure
- A breakdown of all transaction costs including all closing costs, taxes, prepaids and escrow payments
- Page 3 of the Closing Disclosure
- A Payoffs and Payments table that summarizes any payments you are making with the proceeds of the new mortgage such as paying off your existing mortgage or other debt
- A Calculating Cash to Close table that outlines the cash-out the borrower receives or cash required from the borrower when the mortgage closes, including all payoffs. This table also indicates if the figures changed as compared to the Loan Estimate
- Page 4 of the Closing Disclosure
- A summary of loan disclosures that outline the key features of the mortgage including:
- Indicates if you can transfer the mortgage to a third party without permission of the lender
- If your loan has a demand feature, the lender can require the borrower to pay off the mortgage before the end of the mortgage term under specified circumstances
- Indicates if the borrower has an escrow account (also called an impound or trust account) and the costs for the items included in the account
- Some borrowers are required to pay certain monthly expenses such as homeowners insurance and property tax into an escrow account on a monthly basis along with the mortgage payment
- Indicates when your monthly mortgage payment is considered late (how many days) and what the penalty is
- Indicates if your mortgage balance can negatively amortize, or increase, over the term of your mortgage
- Most mortgage do not negatively amortize
- Indicates if your lender accepts partial mortgage payments
- Indicates the property used as security for the mortgage
- If you do not make your mortgage payments you could lose this property
- Page 5 of the Closing Disclosure
- Summary contact information about the key parties involved in the transaction including the lender, mortgage broker (if applicable) and settlement (closing) agent
- A summary of loan disclosures including information about the appraisal report, mortgage contract, foreclosure liability, refinancing the mortgage and the interest expense tax deduction
- A table that summarizes the total amounts the borrower pays over the course of the mortgage including:
Total of All Payments
- The total of all scheduled payments that you will pay over the term of your mortgage (total interest, principal, mortgage insurance and mortgage costs)
- The amount of money the mortgage will cost the borrower over the term of the mortgage
- The total of all scheduled interest payments plus all lender costs
- The mortgage amount available to the borrower after paying any upfront finance charge
- This figure typically matches your mortgage amount
Annual Percentage Rate (APR)
- In short, the APR represents what your mortgage interest rate would be if it included all up-front lender and closing costs, such as points and origination and processing fees, in addition to interest expense
- The APR provides another way for you to review and compare mortgage fees
- If the APR is close to your interest rate then you know that the lender and mortgage costs are relatively small. If the APR is much higher than your interest rate then you know that the lender and mortgage costs are relatively high and you may want to negotiate lower costs or change lenders
- We provide a comprehensive explanation and example of the APR on FREEandCLEAR
Total Interest Percentage (TIP)
- Indicates the the total amount of interest that you will pay over the mortgage term as a percentage of your loan amount
According to mortgage guidelines, the lender must provide a Closing Disclosure to the borrower that outlines the final, actual terms of the mortgage including interest rate, closing costs and mortgage features at least three business days prior to the close of the mortgage. For example, if the borrower received the closing disclosure on a Tuesday, the earliest the mortgage could close is Friday. Typically the borrower receives the Closing Disclosure when he or she signs loan documents prior to the mortgage closing.
The purpose of the Closing Disclosure is for borrowers to understand how and why their mortgage terms changed as compared to the terms the lender offered at the beginning of the refinance process. The Closing Disclosure outlines what loan terms can change and by how much as a way to protect borrowers against a lender bait and switch. A bait and switch is when a lender promises you an attractive set of mortgage terms to win your refinance business even though they know they cannot deliver those terms. The lender attempts to change the terms, such as charging you a higher mortgage rate or closing costs, toward the end of the mortgage process when borrowers are under pressure to close their refinance. The Closing Disclosure is supposed to reduce these lender tactics by providing more information to borrowers.
Because the Closing Disclosure must be provided no less than three days prior to mortgage closing, it could extend the amount of time it takes to process and close your mortgage. For example, all parties may be ready to close the mortgage but if the Closing Disclosure has not been delivered to the borrower then the mortgage cannot be finalized. Borrowers should keep in mind the three day Closing Disclosure waiting period when determining how long it will take to process and close their loans.
The Closing Disclosure must be delivered by the lender to the borrower in-person or by email or mail at least three business days prior to the mortgage closing. If mailed or emailed, the consumer is considered to have received the Closing Disclosure within three business days after the document is delivered or placed in the mail. For example, if the lender mails the closing disclosure to the borrower on a Monday, the borrower is considered to have received the closing disclosure on Thursday and the earliest the mortgage could close is the following Monday (assuming Saturday counts as a business day).
The settlement agent (also known as a closing agent) that administers the mortgage closing process and transfer of funds may provide the Closing Disclosure to the borrower on behalf of the lender; however, the lender is legally responsible for for the Closing Disclosure. The Closing Disclosure must be provided separately to each borrower who has the legal right to cancel or rescind the mortgage prior to closing.
Lenders are required to issue a revised Closing Disclosure if certain changes occur to the mortgage terms after the first Closing Disclosure was issued that cause it to become inaccurate. Below, we outline the three changes that occur before mortgage closing that require a new three business day waiting period after the revised Closing Disclosure is issued. All other changes changes that occur before closing require a revised Closing Disclosure to be issued but do not require a new three day waiting period.
Lenders must issue a revised Closing Disclosure if an event occurs within 30 days of the mortgage closing that causes the Closing Disclosure to be inaccurate and results in a change to a cost paid by the borrower. The revised Closing Disclosure must be provided to the borrower no later than 30 calendar days after the lender becomes aware that the event occurred.
The borrower should use the Closing Disclosure document to verify that he or she is receiving a mortgage at the terms agreed to at the start of the process. At the beginning of the mortgage process the lender provides the borrower a Loan Estimate that outlines a good faith estimate of key mortgage terms such as interest rate and closing costs. Prior to your mortgage closing, you should compare the Closing Disclosure with the Loan Estimate to ensure that your final, actual interest rate and closing costs did not increase significantly as compared to the initial estimate provided by the lender in the Loan Estimate.
If there are meaningful discrepancies between the Closing Disclosure and Loan Estimate and the final mortgage terms have changed or increased significantly, then ask the lender for an explanation as this could be a sign that you are getting ripped off. You should cancel (also known as rescind) the mortgage if you are not satisfied with the lender’s explanation and the discrepancies cannot be resolved. You can cancel your mortgage up to three business days after you sign loan documents and you are free to work with a different lender. Although you may be out non-refundable costs such as your appraisal fee and certain lender fees, canceling a bad mortgage will save you much more money over the life of the loan.
One way to avoid potential negative surprises is to lock your mortgage. That way, all key terms and costs are agreed to by you and the lender at the start of the process and remain unchanged through the closing of your refinance.
The Closing Disclosure contains much of the same information as the Loan Estimate although the information is presented in a somewhat different layout. We summarize each page of the Closing Disclosure below.
Closing Disclosure: https://www.consumerfinance.gov/ask-cfpb/what-is-a-closing-disclosure-en-1983/