EducationFinance January 21, 2019

Mortgage Calculator: Not The Full Equation

What is a mortgage calculator?

If you’re house hunting, then you need to know what you can afford. The first step is getting pre-approved with a mortgage lender. A pre-approval is a basically what the lender says you can afford overall, but it doesn’t tell the whole story. You’ll still want to know what your monthly payments would be. Most people use a mortgage calculator to do this. If you’ve ever used the Internet, then you’ve probably been on Zillow and/or Redfin, and you’ve probably noticed the built-in mortgage calculators they provide. These allow you to automatically see what your payments might be for a specific property.

But wait, there’s more! Online mortgage calculators might be free and convenient, but many of them don’t have all the figures you need to get a good estimate of a monthly mortgage payment. At its most basic, a mortgage calculator only has the mortgage amount, which is the price of the house minus the down payment. The calculator often defaults to a 30-year loan with an interest rate pulled from elsewhere on the Internet. The resulting monthly payment you see only includes the principal and interest on the loan. This is very misleading because there are other costs that go into your monthly payments.

What’s missing?

Property taxes are the biggest omission. In Seattle, the 2018 property tax rate was $9.56 per $1,000 of assessed value, which is roughly 1% per year. So if your property was assessed at $500,000 (assessed value is often much lower than actual market value), then you would pay $4,780 in taxes that year. That alone is an extra $398 a month!

Other costs can include:

  • homeowners insurance
  • homeowners association dues (mostly for condos and planned communities, but these can also be hundreds of dollars a month)
  • utilities
  • general home maintenance and repairs
  • private mortgage insurance (usually required if you put less than 20% down)
  • closing costs

These can all add up to quite a bit more per month than just the sale price of the house.

How can I get a more accurate estimate?

Find a mortgage calculator that has more than just the basic calculations of mortgage amount and interest rate. If you can adjust the figures or enter your own, even better. Many websites that provide free mortgage calculators offer “advanced” versions, so look for buttons or links to those.

Example image of a mortgage calculator

Conclusion (TLDR [too long, didn’t read])

Even if you’re pre-approved and know the overall price of a house you can afford, there are other costs that go into your monthly home payments. The best way to estimate your total monthly payments is to speak with your lender. If you don’t want to bother your lender about every single house you look at and you want to use a mortgage calculator on your own, make sure the calculator you use allows you to enter in your own figures. Are you comfortable with that monthly payment? If not, then you’ll have to work with your lender to reach one that you will be comfortable paying.