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Once you've roughly determined how much you should spend, you'll want to get preapproved with a mortgage lender and confirm your true purchasing power. The most common type of mortgage is a fixed-rate mortgage. The interest rate and monthly payment amount remain the same throughout the loan period. Regular fixed-rate mortgages terms are usually for 15, 20, 25 or 30 years. The shorter the term, the lower the interest rate and interest charges over the life of the loan. However, even though you are saving over the life of the loan, a shorter term means a higher monthly payment.

You may also have heard of Adjustable-Rate Mortgages (ARMs). Adjustable-rate mortgages are 15- or 30-year loans with monthly payments that change over the term of the loan due to increases or decreases in the interest rate. You may have a special circumstance where an ARM makes the most sense for you. The primary advantage of an ARM is a low initial interest rate. Regular ARM adjustments are made at prenegotiated periods of time (six months, one, three or five years). Most ARMs have rate caps to protect you. These may be in the form of limits per adjustment or a lifetime limit for the loan.

Choosing a Lender

Different lenders will offer various types of fixed-rate mortgage loans. When evaluating lenders, you'll want to compare the programs offered to see which would be most beneficial to you. You'll also see which lender can provide you the best rate and lowest fees. Overall, you also want to evaluate how easy the lender is to work with. You'll be relying on the lender to keep you well-informed and complete the loan package in time for your settlement date.

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Evaluating Closing Costs

Your closing costs will typically add up to anywhere from three to10 percent of the value of your total mortgage loan. The seller may pay some of these fees; others you will be responsible for. Your lender may also finance some, or even all, of your closing costs. Closing costs can be divided into three categories: lender fees, prepaid expenses and settlement costs. Here are some of the most common:

Lender Fees

As a nonprofit institution, your credit union will keep these fees to a minimum.

  • Points. Each point equals one percent of your loan’s value. For example, one point on a $100,000 loan would equal $1000. Many lenders offer optional "discount” or "buy-down” points at closing in lieu of higher loan rates.
  • Appraisal fee. Charge for an appraiser to assess the current market value of the property and produce a written appraisal document.
  • Credit report fee. Almost all lenders will obtain your credit report from one or more of the three bureaus. There is a charge for this service.
  • Document preparation/underwriting fee. The charge for the preparation of the loan agreement document.Loan processing fee. Paid to the lender to process the loan.Loan origination fee. Charge to originate and close the loan. Usually equal to one point.
  • Tax service fee. Charge to hire a tax services agency to ensure that you pay your property taxes on time, or that your bills are submitted to your lender.

Prepaid Expenses

Typically, two months of payments on each of these long-term expenses will be held "in escrow.” This means a third party will hold the funds until they need to be disbursed.

  • Interim interest. The interest charged for the remainder of the month in which your loan originates.
  • Property taxes. Local taxes on the ownership of the property. The amount will vary by your area of residence and the property’s appraised value.
  • Mortgage insurance. Also called "PMI,” this is used to protect the lender in case you default on the loan. PMI is required when your down payment totals less than 20% of the value of the property.
  • Hazard insurance. Used to insure the property in case of loss or damage. Receipt of a hazard policy is usually required at settlement.

Settlement Costs

Actual costs for the settlement process:
  • Title insurance fee: Protects you from an inaccurate property title inspection, and insures against any defects in public records.
  • Title search fee: Paid to the settlement company to search public records to insure the seller is the sole legal owner of the property and has the right to sell.
  • Settlement/attorney fees: Paid to the settlement company to cover legal representation and other fees.
  • State taxes: Mortgage taxes charged on the sale of the home.
  • Recording and messenger fees: Charge for filing documents (i.e. the deed) at the county recorder’s office.
  • Home warranty fee: Paid to the insurance company for a warranty to pay for repair or replacement of defective items.Home inspection fee. Charge for a professional inspection arranged by the seller.
  • Survey fee: Charge for a surveyor to measure the property to determine its dimensions, as well as to assess exterior improvements.
  • Notary fee: Paid to a notary public to witness the signing of paperwork and insure its validity.

Not all of these costs will apply to your situation, and there may be additional fees that were not mentioned. When you apply for your mortgage loan, your mortgage officer will give you a "good faith estimate of settlement costs.” This document will outline all of the applicable closing costs and the dollar amounts of each.

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