The Closing Disclosure: What is it and How to Read it

The Closing Disclosure (CD) is a five‑page, standalone form that arrives at least three business days before you close. It’s the final, itemized statement of your mortgage—loan terms, monthly payment, and every dollar moving in or out of the transaction. If you’re a first‑time buyer (or it’s been a minute), mastering the CD is the easiest way to avoid last‑second surprises and make sure the deal you agreed to is the deal you sign.

This guide does two things. First, it explains the 3‑day review rule and what can reset it. Second, it walks through the CD line by line—separating lender fees from third‑party charges, clarifying origination vs. discount points, unpacking prepaids and escrow reserves, and showing how credits/concessions reduce your cash to close. We’ll also use examples from Texas, Florida, and California so you can see how local taxes and insurance change the math for both purchases and refinances.

Why Understanding Your Closing Disclosure Matters

Whether you’re purchasing a new home or refinancing, your Closing Disclosure is your last chance to verify the details before you commit. Once you sign, you’re agreeing to every term and condition listed—so it’s essential to review it carefully. The CD gives you the opportunity to compare your final loan terms and costs to your original Loan Estimate, making sure nothing has changed without your knowledge.

At LendFriend, we encourage borrowers to treat the Closing Disclosure as a checkpoint, not a formality. Take the time to read every section. Your loan officer can walk you through each line, and if you’re working with a real estate agent, they can also help spot discrepancies or common errors. A quick review now prevents stressful surprises later—and ensures you’re closing on the loan you actually want.

Closing Disclosure vs. Final Closing Disclosure

Every mortgage closing involves at least two versions of the Closing Disclosure. The initial Closing Disclosure is sent as soon as your loan is cleared to close, even if a few numbers still need to be finalized. This version starts the mandatory three‑business‑day waiting period required by federal law. Because that review period cannot begin until the borrower receives the CD, lenders often send the initial version with minor, estimated adjustments still to come.

During that three‑day window, your lender, title company, and real estate agent continue to reconcile prorations, credits, and third‑party invoices. As those final numbers lock in, you’ll receive the Final Closing Disclosure—the last, corrected version showing the exact figures you’ll sign at closing. This final CD replaces the earlier version and becomes the official record of your loan.

In short: the initial CD starts the clock; the Final Closing Disclosure ends the process. Reviewing both matters, but the final version is the one that confirms your true loan amount, rate, and cash to close. Always compare the two and make sure every update makes sense before you sign.

What the 3‑Day Rule Actually Means

You must receive your Closing Disclosure at least 3 business days before signing your final documents. This gives you time to review the numbers, compare them to your Loan Estimate, and request corrections if something doesn’t look right.

A corrected CD doesn’t reset the clock unless there’s a major change—like a significant APR increase, the addition of a prepayment penalty, or a change in loan type (for example, from fixed to ARM). For small adjustments, your lender can issue a revised CD and still close on schedule. Always use the time to double‑check; even small errors can affect funding or delay your closing.

Page 1: Your Deal at a Glance

Loan terms. Confirm the loan amount, interest rate, whether the rate is fixed or adjustable, prepayment penalty (should be “No” for most residential loans), and balloon features (rare).

Projected payments. You’ll see principal & interest, plus mortgage insurance if applicable, and the escrowed portion for property taxes and homeowner’s insurance. This is your real monthly payment—not a marketing estimate.

Costs at closing. This is a summary box. The details live on page 2; the net “Cash to Close” is finalized on page 3.

Page 2: The Line‑by‑Line Breakdown (Where Most Questions Come Up)

Page 2 has three sections for Loan Costs (A–C) and two for Other Costs (E–H). Read these carefully and think “who gets paid?”

A. Origination Charges (Lender/Broker)

These are your lender or broker’s charges for making and pricing the loan.

Administrative fee or Lender Fee. Most often a flat dollar amount (typically around $1200-$1700). This covers the cost to originate, underwrite, and process your file. Some lenders add additional fees such as Underwriting and Processing separately; others include them in one Administrative Fee line.

Origination Fee or Discount Points. Optional, upfront interest to “buy down” your rate (1 point = 1% of the loan amount). Paying points raises closing costs and lowers the interest rate. Sometimes borrowers will pay a small lender fee because they straddle 2 different rates (for instance, a 6% and a 6.125%) and are willing to pay a few hundred dollars to access the 6%. The mirror image is a lender credit (covered later): a higher rate that generates a credit to offset costs.

Application/commitment/lock fees. If charged, they belong here. Many lenders build lock costs into pricing rather than a separate line—either way, it must be disclosed. If you're seeing these fees, ask your lender to waive them. They are not normal.

Key distinction: “Origination Charges” on the CD is the subtotal of all items in Section A. It’s not the same thing as a single line called “loan origination fee,” even if that line appears.

B. Services You Cannot Shop For (Third‑Party)

Required services where the lender chooses the provider. Typical items: Appraisal, Credit report, Flood determination, Tax service/monitoring, and occasionally specialized verifications. These are not lender profit—they’re pass‑throughs to outside vendors. If your actual costs come in lower than estimated, you'll end up paying less. 

C. Services You Can Shop For (Third‑Party)

Services you could pick from a list or source yourself: Title search & title insurance, Settlement/escrow/closing fee, Survey (often required in TX and FL), Pest/termite (commonly for VA or local requirements). These can vary the most by market.

E. Taxes and Government Fees

Recording fees (local clerk) and any transfer/recordation taxes charged by your state or city. These are set by governments—not lenders.

F. Prepaids

Amounts due in advance at closing: Homeowner’s insurance (typically first year paid in full), Prepaid interest from closing date to month‑end, and any upfront mortgage insurance (e.g., FHA UFMIP) if applicable. These are not “fees”; they’re the cost of real insurance and real interest for a defined period.

G. Initial Escrow Payment at Closing

If you escrow taxes/insurance, your lender collects a starting balance so future bills can be paid on time. Expect 2 months of cushion on most items plus the months needed so the next bill is fully funded by the due date. Escrow math changes with closing date and local billing cycles, so this section is often one of the larger line items even though it’s your money held for your bills.

H. Other

Items that don’t fit neatly elsewhere: Owner’s title insurance (your optional protection), home warranty (if any), certain HOA transfer or capitalization fees, or courier charges.

POC (Paid Outside of Closing): If you prepaid the appraisal or home inspection, the CD still lists the charge but marks it P.O.C. so it doesn’t count toward cash to close.

Lender Fees vs. Third‑Party Charges (How to Tell Quickly)

A fast test: Section A = lender/broker. Sections B, C, E, and most of H = third parties or government. If you’re comparing your CD to your Loan Estimate, tolerance rules—federal limits on how much certain fees can change between your Loan Estimate and Closing Disclosure—protect you from unexpected increases. For example, lender and origination fees (Section A) generally cannot rise at all unless you changed loan terms or the property. Appraisal and credit report fees fall into a 10% cumulative tolerance group, meaning they can increase slightly but not by more than 10% in total. Government taxes or prepaid costs, like property taxes or insurance, are not subject to tolerance limits because they are outside the lender’s control. Big, unexplained jumps should always be questioned. If something in A appears you never discussed, ask for an explanation.

Lender/Broker Fees vs. Discount Points (Two Different Levers)

Lender Fees or Broker Fees compensates the lender/broker for building and approving your loan. Discount points are an interest‑rate trade—you pay more today for a lower rate tomorrow. Both sit in Section A, but they do different jobs. On many loans you’ll choose one of three paths:

• Lowest upfront cost: minimal/zero origination and a lender credit (slightly higher rate) to offset third‑party costs.

• Balanced: modest origination, no points, small or no lender credit.

• Rate‑focused: pay discount points to reduce the rate; expect higher cash to close.

The right choice depends on how long you’ll keep the loan. Short horizon? Credits help. Long horizon? Points can make sense.

Prepaids & Escrows: Why They’re Big and Why They’re Not “Junk”

Prepaids (F) are real bills due now—insurance and daily interest. Escrow deposits (G) are reserves so the lender can pay taxes/insurance later. They raise cash to close, but they’re not fees.

• Example (TX taxes). Purchase price $400,000 in a county with ~2.0% effective tax. Annual tax ≈ $8,000. If you close in August and the full bill is due in January, expect several months of tax deposits plus a two‑month cushion so the servicer can pay the full bill on time. Your monthly escrow for taxes alone will run ≈ $667.

• Example (FL insurance). Annual homeowner’s insurance ≈ $5,500 (hurricane risk). You’ll often see the first year’s premium in Prepaids plus 2–3 months in Escrow, adding $1,000–$1,500 to cash to close.

• Example (CA property tax). Base rate around ~1% of price, billed on a semiannual cycle. On an $800,000 home, expect ~$8,000/year. Depending on when you close relative to county cycles, your escrow deposit could be a few thousand; homeowner’s insurance premiums are often lower than FL unless you’re in a wildfire‑exposed area.

Credits and Concessions: Where the Savings Show Up

Credits reduce what you must bring to closing. On the CD you’ll see them as negative numbers or a line in the Calculating Cash to Close and Summaries of Transactions sections.

Seller credits (a.k.a. seller concessions). Negotiated in the contract to cover buyer costs. They can offset third‑party fees, prepaids, and escrow deposits—but not your down payment. Programs cap these (e.g., many conventional loans cap at 3% with low down payments). If you negotiated $8,000 from the seller and don’t see it on page 3, speak up immediately.

Lender credits. A pricing choice: accept a slightly higher rate to generate a dollar credit that offsets costs. This often appears at the bottom of the Loan Costs table or in the cash‑to‑close section as “Lender Credit.” Credits can’t exceed actual allowable costs; if the final bill runs lower, the credit is reduced—not paid as cash.

Agent/builder credits. Occasionally your agent or a builder contributes. They’ll appear similarly to seller credits and apply to allowable costs.

Tip: Credits make the lender‑vs‑third‑party distinction obvious. A seller can’t pay your lender’s profit, but they can absorb title, escrow, transfer taxes, and prepaids. A lender credit can offset almost any allowable closing cost category.

Purchase vs. Refinance: What Changes on the CD

Purchases show two columns on page 3 (Buyer and Seller) and include down payment and often owner’s title insurance and transfer taxes depending on state.

Refinances have no seller column. You’ll see a payoff of your current loan, updated lender’s title policy/endorsements, and similar third‑party fees. Two practical differences:

• Right of rescission. On a primary‑home refinance, funding occurs three business days after signing. You’ll see a disbursement date. Purchases fund the same day.

• Escrow rollover. Your old escrow balance doesn’t transfer. You’ll fund a new escrow on the refi CD and later receive an escrow refund from your prior servicer—so it can feel like “double paying” temporarily, but the refund evens it out.

Cash to close vs. cash out. On a no‑cash‑out refi, many borrowers structure the loan so $0 is due at signing. On a cash‑out refi, the CD will show Cash to Borrower—the amount you’ll receive at disbursement after payoffs and fees.

How to Quality‑Check Your CD in 10 Minutes

1. Names, property, loan type. Exact match to your contract and disclosures.

2. Rate and payment. Match your lock terms; verify mortgage insurance (if any) and whether you’re escrowing.

3. Section A vs. B/C. Confirm lender fees vs. third‑party charges; question any surprise in A.

4. Prepaids/Escrows. Sanity‑check against local taxes/insurance and your closing date.

5. Credits. Seller/lender/agent credits present and sized as agreed.

6. Cash to Close (page 3). Is the final number what you expected to wire?

If anything feels off, ask your loan team to walk you through page 2 and the cash‑to‑close math. Good lenders will review it with you line by line.

Purchase and Refi Examples (So You Can See the Flow)

Purchase, Austin, TX (FHA with seller credit). $450,000 price; 3.5% down. Seller credit $7,000. Taxes ≈ 1.9% ($8,550/yr). Insurance $1,800/yr.

• Section A: $1,095 underwriting/processing; $0 points.

• Section B/C: Appraisal $650; Title + settlement $2,100; Survey $475.

• Section E: Recording $185.

• Section F: Prepaid insurance $1,800; prepaid interest 11 days ≈ $700.

• Section G: Taxes deposit 5 months ≈ $3,563; insurance deposit 3 months $450.

• Credits: Seller –$7,000; Lender –$1,500.

• Cash to close: Down payment $15,750 + costs/prepaids/escrows ≈ $10,118 – credits $8,500 ≈ $17,368.

Refi, Boca Raton, FL (rate‑and‑term, escrowed). $600,000 loan replacing a $612,000 balance (skip‑pay effect); Insurance $5,800/yr; FL doc stamp/intangible apply.

• Section A: $1,295 origination; $0 points.

• Section B/C: Appraisal $700; Title update + endorsements $1,150.

• Section E: Doc stamp + intangible based on note/mortgage.

• Section F: Prepaid interest 15 days ≈ $1,500; first‑year insurance not due if mid‑term.

• Section G: New escrow for taxes/insurance ≈ $4,300.

• Credits: Lender credit –$2,000 sized to target ~$0 cash to close.

• Cash to close: Structured to $0; funding after 3‑day rescission.

Purchase, San Diego, CA (conventional, escrow waiver). $900,000 price; 20% down. County transfer tax applies; wildfire‑adjacent zone with higher insurance.

• Section A: $995 processing; $0 points.

• Section C: Title + settlement ~$3,000.

• Section E: Transfer/recording ~$1,100+.

• Section F: First year insurance $2,400; prepaid interest 10 days.

• Section G: Smaller because escrow waived (allowed with 20% down, pricing add‑on may apply).

• Credits: Builder credit –$5,000 for closing costs.

• Cash to close: Down payment $180,000 + net costs after credits.

Bottom Line

The Closing Disclosure is built to protect you. Read page 1 for the big picture, page 2 for who gets paid and why, and page 3 to verify cash to close. Know which lines are lender profit (A) and which are independent services (B, C, E, H). Expect prepaids and escrows to be large but remember they’re not fees. Make sure every promised credit appears.

Give the CD a careful pass the day you receive it and again the morning of closing. If anything doesn’t make sense, ask.