Why mortgage calculators aren’t accurate for estimating housing costs
Let’s face it: a little back-of-the-envelope math just won’t cut it when you’re trying to buy a home.
Becoming a homeowner is a complicated process and a major financial commitment, and determining the true cost requires a fair amount of research.
Many people often turn to online mortgage calculators to figure out what they can afford, but this tool has some glaring limitations.
In fact, the Consumer Financial Protection Bureau (CFPB) describes two major problems with many mortgage calculators: they only consider payment of principal and interest and they are only as accurate as the information you provide.
Your principal payment is the amount you owe on your loan, and the interest rate is the extra amount the lender charges you to borrow money. Together this is your mortgage payment, but it is not the only monthly cost you will incur.
You should factor in property taxes, private mortgage insurance (PMI), home insurance, utilities, and homeowners association fees (if you expect to have any), to get an idea of what you will pay each month. Many mortgage calculators do not estimate these costs accurately, relying on the user to enter the numbers themselves, or omit them all together. There are also closing costs that you must pay up front, which can be up to 5% of the purchase price of the home.
Online real estate resource Zillow Group tries to solve this problem. Last month, he launched Realestate.com, a new site aimed at millennials looking for their first home. Their new all-in-one monthly pricing tool allows you to see all possible monthly expenses – and a breakdown of closing costs – for each property listed on its site.
This includes accounting for utilities, which are typically omitted from mortgage calculators, using location data available for each property.
According to Zillow Group’s Consumer Trends Report, based on a survey of 13,000 homeowners, sellers, buyers and renters, 39% of first-time buyers exceed their original budget.
Jeremy Wacksman, CMO of Zillow Group, told Business Insider that they created this tool to make budgeting a priority in the home buying process.
“We find that almost half of first-time home buyers are also considering renting, so [this makes it so they’re] really thinking about them side by side,” Wacksman said. “As a tenant, you usually think of a cost per month.
One of the main benefits of Realestate.com’s all-inclusive monthly cost tool is that these estimates provide context for homes currently on the market. Rather than blindly looking at a sign-up price, an all-inclusive monthly cost estimate gives a better idea of affordability.
It doesn’t help much if the house you’re looking to buy isn’t on Zillow, although you can compare it to something similar in the area.
Also keep in mind that interest rates are very personal and depend on your credit history, type of loan, income, debts and the specific lender. This tool fills with a default interest rate of 3.79%, based on a 30-year fixed mortgage with a 20% down payment. But you can use CFPB’s interest rate tool to enter some of this information and get a more accurate rate to further customize your all-inclusive monthly cost.