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Make sure to make your own adjustments to get a complete picture of all the costs

Updated: April 07, 2017

Although many people enjoy a good mystery, it isn't as much fun when the mystery involves personal finances. Unfortunately, for those thinking about buying a house, figuring out how much they can afford to spend may seem too much like a puzzle.

For that reason, many use a mortgage calculator when crunching the numbers. This type of calculator converts the amount of a loan or the price of a house into the corresponding monthly payment. Although these calculators can be good tools for doing complicated calculations and getting a close estimate of what the monthly payment for a new house would be, many of them do not provide a complete picture of all the costs involved. Therefore, consumers need to make their own adjustments as well as using the calculators.

How Mortgages Calculators Work

In order to understand how a mortgage calculator works, it is important to understand first what a mortgage actually is. A mortgage is a type of loan that allows consumers to borrow money in order to buy a house and pay the loan back in monthly payments. The mathematical formula that is used to calculate monthly payment amounts for any given mortgage is fairly complex, which is why the mortgage calculator was developed to do the math.

The calculators work well in helping people quickly figure out the monthly payment for a specific home price or loan amount. However, there are two problems with the devices.

  1. Problem One: Many calculate only the principal and interest payment.
  2. The principal is the amount of money a person borrows and has to pay back, and interest is the amount that the lender charges them in exchange for lending the money. Together, the principal and interest make up most of a monthly mortgage payment. However, these are not the only costs consumers pay each month.

    Consumers using a mortgage calculator to figure out how much they can spend on a house may be significantly underestimating how much they will have to pay per month.

    To make sure that their decisions are based on the right numbers, consumers should do their research to figure out how much they might be expected to pay per month for homeowner's insurance, property taxes, and mortgage insurance. These amounts must be added to the principal and interest payment amounts in order to determine a total monthly payment amount.

    In addition, if the condo or house under consideration is located in a community with a homeowner's association (HOA), consumers will also need to estimate and add in condo/HOA dues to the total monthly payment. Although these dues are usually paid separately from the mortgage payment, they are still part of consumers' overall monthly housing costs. Such dues may greatly vary and have an impact on the house price that the consumer can afford.

    Estimating the additional costs

    Consumers who are just beginning the process of buying a house will need only a rough estimate to help them figure out how much they can afford. They'll be able to make more precise estimates as they collect more information.

    • Property taxes. Listings of properties for sale frequently include estimated property tax information. Browsing these listings can give buyers a good idea of what to expect, but they need to remember that such estimates may not be completely accurate. They can also go to the website of the county auditor, county assessor, or whatever other local entity is responsible for property taxes.
    • Homeowner's insurance. Get a sense of the typical costs in the area by asking around with family, friends, or a real estate agent. Contact an insurance company to get a more precise estimate, and also check with auto insurance companies to see if they sell home insurance and might be willing to provide a discount on bundled coverage.
    • Mortgage insurance. Consumers who will be making a down payment of less than 20 percent will probably need to pay for mortgage insurance. The best method for figuring out how much mortgage insurance will cost based on individual circumstances is to talk to a lender.
    • Condo/HOA dues. Again, checking listings is the best way to determine how much payments might require.
  3. Problem Two: Mortgage calculators are only as good as the data you put in them.

Mortgage calculators use a user's inputs plus a standard formula to calculate monthly payments. Some make certain assumptions for the user, while others require the user to control all inputs. The most important factors involved in calculating the monthly principal and interest payment are the amount of the loan, the length of the loan (the loan term), and the interest rate.

It is key to choose a realistic interest rate to use with a calculator. These rates make a great deal of difference in the amount of mortgage payments. For example, a $200,000, 30-year, fixed-rate loan at four percent interest has a monthly principal and interest payment of $955, while at five percent interest the monthly payment is $1,074.

Interest rates advertised by lenders on the internet are not necessarily those that consumers will be able to get. Such rates generally assume that the buyer has an excellent credit score and will be able to make a down payment of at least 20 percent.

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How Much Does It Cost to Buy a Home?

In addition to the above-mentioned monthly costs, there are also several upfront costs that buyers pay when closing on their loan. These are called closing costs and are in addition to the down payment. Closing costs typically include the following:

Are You Planning to Buy a Home? Make Sure You Know How to Use a Mortgage Calculator
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  • Origination and lender charges. The lender charges these for "originating" or making the loan. They are included in the price of borrowing money. Different lenders can itemize these costs to varying degrees, but what's important is the overall total. Common charges fall under the labels of origination fees, application fees, underwriting fees, processing fees, administrative fees, etc.
  • Points. Points are a charge that the buyer pays the lender upfront. They are calculated as a certain percentage of the amount of the loan, and buyers can typically choose whether or not to pay them.
  • Third-party closing costs. These costs are charges for those services provided by third parties that are required to obtain a mortgage. Examples include appraisals and title insurance.
  • Taxes and government fees. The buyer's local government charges these fees in connection with the real estate transaction that transfers the property from the seller to the buyer.
  • Prepaid expenses and deposits. These kinds of expenses can be associated with the buyer's loan or with owning a home. In general, the buyer needs to prepay the interest on their loan between the time they closed and the end of that month. Another common practice is to pay the first year's homeowner's insurance premium and make initial deposits into an escrow account for future homeowner's insurance and property taxes.

When to Use a Mortgage Calculator

Mortgage calculators can be used throughout the homebuying process.

  • For buyers early in the process: Mortgage calculators can help these buyers figure out how much they want to spend on a house. First, they should calculate the total amount they can comfortably afford to spend every month on a house. Next, they need to estimate how much they have available to pay for the principal and interest payment by subtracting their estimates for property taxes, homeowner's insurance, and—when applicable—mortgage insurance and condo/HOA dues. At this stage these will be very rough estimates.

    Then they should determine the range of interest rates that they can expect so their mortgage calculator results will be more accurate.

    Homebuyers might want to find a calculator that lets them input the interest rate and the amount of the principal and interest payment in order to calculate the maximum amount they can afford for a loan. Alternatively, they can simply use a standard mortgage calculator. They can begin will a home price or loan amount close to what they want and a realistic interest rate to determine if they will be able to afford the resulting principal and interest payment.

  • For buyers beginning to look at specific houses: These consumers can use the calculator to figure out the principal and interest payment per month for particular home prices and loan amounts. Once they do this, they also need to remember to add their estimates for property taxes, homeowner's insurance, and—when applicable—mortgage insurance and condo/HOA dues to the monthly principal and interest payment. Then they'll know how much that particular house will actually cost them every month.

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