Review Closing Disclosure
TLDR: You’ll be provided a closing disclosure with a breakdown of all transaction costs at least three days before closing.
When will I know the actual closing costs and down payment total?
Before you close, the lender (or title company if you’re not getting a loan) will provide you with a five page document called a closing disclosure, previously referred to as a HUD-1, which has the breakdown of what funds are owed to and by each party at closing. In some states you're legally permitted three days to review the closing documents and disclosures, so at minimum, you'll know how much you’ll owe three days before closing. However, the exact amount depends on a lot of factors–prorated taxes, local water companies holding deposits, etc., and so it can be complicated to calculate exactly what you'll need to close.
Fun Fact
In 2015, the closing disclosure replaced the HUD-1 settlement statement as the final document that mortgage borrowers are given before signing closing paperwork. These changes were part of the TILA-RESPA Integrated Disclosure (TRID) rule implemented by the Consumer Finance Protection Bureau, and included a mandate requiring delivery of the closing disclosure at least three business days before closing to prevent surprises at the closing table. Today, closing disclosures for buyers are provided by lenders with the onus on the settlement company to ensure that the seller receives a closing statement.
The Closing Disclosure
This Closing Disclosure Explainer from the Consumer Financial Protection Bureau provides an outstanding explanation of the sections within a closing disclosure.
For quick reference, here are the five pages you’ll see in a closing disclosure.
What on earth is escrow?
There are a lot of costs that go into the total monthly mortgage payment: the loan itself with principal and interest, taxes, homeowner's insurance, PMI. That’s not even factoring in any utilities like water, gas, electric, trash, HOA and condo fees, etc. Escrow is a bank account held by a neutral third party to ensure many of the aforementioned items are paid on time. When you pay your Earnest Money Deposit, the title company deposits it into a bank account called an escrow account until closing, at which time funds are allocated according to the terms of the contract.
After closing, the lender sets up an account that distributes the total monthly payment among respective accounts. Real estate taxes and homeowner's insurance are examples of parties that are usually paid from escrow accounts.
Fun Fact
When someone owns their home "free and clear," referring to a clear title, it means the mortgage is paid off. Homeowners then become responsible for making those tax and insurance payments themselves instead of through an escrow account managed on their behalf (as required by the lender).