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Your mortgage calculator may be setting you up for a surprise

Buying a home is exciting. It’s also one of the most important financial decisions you’ll make. Choosing a mortgage to pay for your new home is just as important as choosing the right home.

You have the right to control the process. Check out our other blogs on homebuying topics, and join the conversation on Facebook and Twitter using #ShopMortgage.

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Mysteries are fun — in movies, books, and TV, that is. Mysteries involving your finances? Not so much. If you’re thinking about buying a home, figuring out how much you can afford to spend may feel like solving a puzzle. 

Many people turn to mortgage calculators to solve that mystery. A mortgage calculator translates a home price or loan amount into the corresponding monthly payment. While a mortgage calculator can be a great tool to crunch some complicated numbers and get a ballpark estimate of your monthly payment, many calculators won’t give you a complete picture of all the costs. That’s why you could be setting yourself up for a surprise if you only rely on a mortgage calculator without making your own adjustments. 

Keep reading to:

  • Learn how mortgage calculators work
  • Get tips on when to use a mortgage calculator 
  • Understand the monthly and upfront costs associated with buying a home

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How a mortgage calculator works

A mortgage is a loan that allows you to borrow money to buy a home and pay back the loan in monthly payments. The mathematical formula for calculating the monthly payments for a given mortgage loan amount is pretty complicated. That's where a mortgage calculator comes in. A mortgage calculator does the math for you.  

Mortgage calculators are great for quickly finding out the monthly payment for a particular home price or loan amount — there’s no need to try to do the math by hand. But there are two problems with mortgage calculators.

Problem 1: Many mortgage calculators only calculate the principal and interest payment.

Principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money. Principal and interest make up the majority of a monthly mortgage payment.  

But, principal and interest are not the only costs you’ll pay each month.  

If you’re using a mortgage calculator to decide how much you can afford to spend on a home, you may be significantly underestimating how much you’ll have to pay each month. That’s a surprise you don’t want.

To make sure you’re making decisions using the right numbers, do your own research to find out how much you can expect to pay each month for homeowner’s insurance, property taxes, and mortgage insurance. Add those monthly amounts to the principal and interest payment from your mortgage calculator to find out how much you can expect to pay for your total monthly payment.  

If you’re considering buying a condo or a home in a community with a homeowner’s association (HOA), you’ll need to estimate and add in condo/HOA dues, as well. Although monthly condo or HOA dues are usually paid separately from your monthly mortgage payment, they are part of your overall monthly housing costs. These dues can vary widely and affect the home price you can afford. For example, a $200,000 condo with a lot of amenities and $500 monthly condo dues may have the same overall monthly cost as a $300,000 single-family home with no condo or HOA dues.

How do you estimate these other costs?

If you’re just getting started with your homebuying process, all you need for now is a rough estimate to help you determine how much you can afford to pay for a home. As you move forward and gather more information, you’ll be able to make more precise estimates.  

  • Property taxes. For-sale listings often include estimated property tax information. Browsing listings for neighborhoods you are interested in can give you a good sense for what to expect, but keep in mind these estimates may not be fully accurate. Or, visit the website of the county auditor, county assessor, or other local entity responsible for property taxes.
  • Homeowner’s insurance. You can ask around with family, friends, or a real estate agent to get a quick sense of the typical costs in your area. For a more precise estimate, contact an insurance company. You can also check with your auto insurance company to see if they sell home insurance; often there are discounts for bundling your coverage.
  • Mortgage insurance. If you plan on making a down payment of less than 20 percent, you will likely need to pay for mortgage insurance. Talking with lenders is the best way to find out how much you can expect to pay for mortgage insurance, based on your situation.
  • Condo/HOA dues. Checking for-sale listings in neighborhoods you are interested in is the best way to get a sense for how much you might pay.  

Problem 2: Mortgage calculators are only as good as the information you give them.

A mortgage calculator uses your inputs and a standard formula to calculate a monthly payment. Some calculators make some assumptions for you, while others let you control all of the inputs. The key factors that determine the monthly principal and interest payment are the loan amount, the length of the loan (known as the loan term), and the interest rate. 

Choosing a realistic interest rate to use with a mortgage calculator is critical. The interest rate makes a big difference in your 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. The same loan at five percent interest has a monthly payment of $1,074.  

The interest rates that lenders advertise on the internet are not necessarily the rates you will be able to get. Advertised rates usually assume that you have an excellent credit score and will make a down payment of at least 20 percent. 

Use our tool to explore the different factors that affect the interest rate lenders are willing to offer you and get a sense of the range of rates you can expect. Make sure you use a realistic interest rate in the mortgage calculator so you get a good estimate of the monthly principal and interest payment.

Three kinds of costs

Most mortgage calculators focus only on the monthly principal and interest payment. Learn the three different kinds of costs you’ll pay when buying a home.

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The costs of buying a home

In addition to the monthly costs discussed above (property tax, homeowners insurance, mortgage insurance, condo/HOA dues), there are a number of upfront costs that you pay when you close on your loan. These costs, known as closing costs, are in addition to your down payment. Typical closing costs include:

  • Origination and lender charges. These costs are charged by the lender for “originating” or making the loan. They are part of the price of borrowing money. Different lenders may choose to itemize these costs to varying degrees – it’s the overall total that matters. Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc.
  • Points. Points are a charge you pay upfront to the lender. Points are calculated as a percentage of the loan amount. You can usually choose whether or not to pay points. Learn more about points.
  • Third-party closing costs. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance. You can shop separately for some of these services.
  • Taxes and government fees. These fees are charged by your local government. They are charged in connection with the real estate transaction transferring the property from the seller to you.
  • Prepaid expenses and deposits. These expenses may be associated with your loan or with homeownership. Typically, you need to prepay the interest on your loan between the time you close and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.

When to use a mortgage calculator

Now that you know about the limitations of mortgage calculators, let’s talk about when you should use one. You can use a mortgage calculator throughout your homebuying process. 

If you are early in the process: You can use a mortgage calculator to help you decide how much you want to spend on a home. First, decide the total amount you can comfortably afford to spend each month for your home. Then, estimate how much you have available for the principal and interest payment by subtracting your estimates for property taxes, homeowner’s insurance, and — if applicable — mortgage insurance and condo/HOA dues. These are very rough estimates at this stage, but that’s ok.  

Next, use our explore interest rates tool to find out the range of interest rates you can expect, so that your mortgage calculator results are more accurate for you.  

You may want to look for a calculator that allows you to input the interest rate and the principal and interest payment amount to calculate the maximum loan amount you can afford. Alternately, you can use a standard mortgage calculator. Start with a ballpark home price or loan amount and a realistic interest rate to find out whether the resulting principal and interest payment is affordable. You can play around with different scenarios.

Remember, these numbers are just a starting point. As you move forward and gather more information, you can go back and refine those initial calculations. 

As you start to look at specific homes: Use a mortgage calculator to calculate the monthly principal and interest payment for specific home prices and loan amounts. But remember, don’t stop there! Add your estimates for property taxes, homeowner’s insurance — and, if applicable, mortgage insurance and condo/HOA dues — to the monthly principal and interest payment. That way, you’ll know how much that home will really cost you each month.

How to find a mortgage calculator

You can use our simple mortgage calculator to calculate the monthly principal and interest payment for different home prices, interest rates, and loan terms. Our calculator also tells you the total amount of interest you’ll pay in each scenario. There are many other mortgage calculators available online. Try searching for "mortgage calculator."

Don’t let your monthly mortgage payment be a mystery. Mortgage calculators are helpful tools to get an estimate as you shop, but make sure you’re considering all the additional costs of buying a home before you make a decision. 

Want more information on your homebuying journey? We’ve got a lot of information on our site already to help you get started.  

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