How Mortgage Calculators Are Misleading

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Homebuyers in a hurry to find dream homes before interest rates rise often turn to online mortgage calculators offered by personal finance and real estate sites to get an idea of ​​just how much a home will cost. dream they can afford.

When they do, they risk getting the wrong information, experts say.

“Most online mortgage calculators don’t provide all the information you need to estimate a house payment,” said Bob Harkson, certified financial planner at Phase 2 Wealth Advisors in Gig Harbor, Washington.

What Calculators Omit

Calculators often omit important costs and provide inaccurate estimates of others, critics say.

“Taxes, insurance, homeowners association dues or condo management fees, utilities and general maintenance are variables that aren’t accounted for in traditional mortgage calculators,” said Sonu Mittal, head of home mortgages for Citizens Bank in Providence, Rhode Island.

Property taxes are often the biggest omission. Many online calculators only have three input fields: mortgage amount, interest rate, and number of years. The resulting payment includes only principal and interest.

Yet monthly payments typically include a significant contribution to an escrow fund for annual property taxes. Property taxes vary greatly depending on local tax rates, but can amount to thousands of dollars per year, adding hundreds per month to the mortgage payment.

Insurance is another important element that is often overlooked. The costs of a home insurance policy are usually also collected monthly in an escrow fund from which the annual premium is paid once a year.

Until you actually have a property, it is difficult to enter all the costs.

Marc Burrage

Executive Director of Mortgage Digital Experience for USAA

“Not just property and casualty insurance but, depending on where you live, that may require hurricane or flood insurance,” Harkson said. In total, insurance premiums can add hundreds of dollars per month to a monthly payment.

Homeowners association fees are often the second biggest item missed by calculators. Many single-family homes are not governed by associations and therefore have no fees. Others may owe fees of only a few dollars per month. But some high-end condominium associations and planned communities require payments that, again, can run into the hundreds per month.

Private mortgage insurance may be required for loans when borrowers do not pay at least 20%. With annual premiums of up to 1% of the loan amount, this too can easily make the difference in affordability.

In addition to these common costs not captured by many mortgage calculators, monthly payments can also include points and other closing costs that are not paid in cash at closing.

Finally, although they are not part of the mortgage payment and can vary widely from property to property, the costs of utilities and repairs should also be considered by savvy homeowners when deciding on the amount. they can afford to spend.

Home buyers armed with less than accurate payment estimates are setting themselves up for failure. “They may find out they’re not eligible for the loan or the house they’re interested in until it’s too late in the game,” Mittal said.

Worse still, they may qualify for a loan that they later discover they cannot afford because their estimates were wrong. “When you have variables in a model that can go up or down and all of them are false on the downside, you have a big problem,” Seagraves said.

Compensate Calculators

Online calculators aren’t the last word when it comes to determining your payments. Mortgage brokers and lenders are legally required to provide borrowers with a loan estimate form that includes estimated taxes and insurance as well as interest and principal payments.

The borrower must obtain the loan estimate within three days of submitting an application. This is always an estimate and borrowers will not know their actual penny payment until closing.

Still, the lender’s loan estimate is probably more accurate than any online calculator.

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Until they get their loan estimate, home buyers can sidestep the gaps by choosing the right tool.

Seagraves says he hasn’t found any online calculators that do the math incorrectly. But only a small number allows you to enter numbers for these often overlooked amounts.

Online calculators recommended by home finance experts for their ability to include a wider range of costs include those from Bankrate, NerdWallet, DinkyTown, Realtor and Zillow.

Taxes, insurance, homeowners association dues or condominium management fees, utilities and general maintenance are variables that are not taken into account in traditional mortgage calculators.

Sonu Mittal

head of home mortgages for Citizens Bank

In the end, Seagraves advises against any online calculator. He prefers spreadsheets.

“The most basic spreadsheets that work on Android or iPhone devices can do a better job of calculating mortgage payments than online calculators,” he said.

Even the best calculators require accurate, up-to-date numbers for taxes, insurance, and other costs. Mark Burrage, executive director of mortgage digital experience for USAA in San Antonio, says the best results require single-home-specific numbers.

“Until you actually have a property, it’s hard to get into all the costs,” Burrage said. To find out, he suggests carefully reviewing the list of properties and interviewing real estate agents, tax authorities, insurance brokers and the current owner.

Calculators are useful for comparing interest rates, Burrage says, but they’re rarely definitive and often only give a small picture of what the final payment will be.

“They don’t miscalculate,” Seagraves said. “They just misled.”

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