What type of disclosure provides educational information for loan applicants on how loan terms impact principal reduction?

The correct answer is the Closing Disclosure, which is designed to provide borrowers with detailed information about the final terms of their loan agreement before they sign the documents at closing. This document breaks down the loan terms, including the interest rate, monthly payments, and any costs or fees associated with obtaining the loan.

What sets the Closing Disclosure apart is its role in ensuring that borrowers fully understand how various terms—such as the interest rate and loan duration—affect their overall costs, including principal reduction over time. By comparing the Closing Disclosure with the Loan Estimate they received earlier, borrowers can see how their proposed loan structure will impact their financial obligation, allowing them to make informed decisions.

In this context, the other options do not focus as specifically on this educational purpose. The Loan Estimate provides preliminary information about loan terms and costs but is not as detailed as the Closing Disclosure. The Truth in Lending Statement also provides essential information on loan terms and costs, but it is more focused on the cost of credit rather than the specifics of how loan terms directly impact principal reduction. The Pre-Closing Disclosure is not a standard term used in the federal regulations; instead, it refers to documents provided in some cases before the actual Closing Disclosure, but it isn't the primary educational tool