January 30th, 2017 5:06 AM by Jackie A. Graves, President
Mortgage calculators help us answer a number of important
questions. From how much house we can afford to saving money on a refinance, a
calculator provides the data we need to make critical financial decisions. As
reported by the CFPB,
however, we shouldn't blindly follow a mortgage calculator's results.
there are several traps to avoid when using a calculator to make home
purchasing or refinancing decisions.
What goes in a mortgage payment
A mortgage payment often combines five different expenses. There
are, of course, the principal and interest payments. In addition, many mortgage
servicing companies collect for insurance, real estate taxes, and private
mortgage insurance. A mortgage calculator should factor in all of these
In our case, my wife and I pay almost $1,000 a month just in real
estate taxes and homeowner's insurance. Excluding these from the calculation
would significantly understate our actual monthly payment. Karl's mortgage calculator, one of my favorites,
factors in all of these potential expenses.
2. HOA Fees
As an investor, one thing I try to avoid is buying a rental
property that comes with Homeowners' Association Fees. HOA fees eat into a
property's cash flow, particularly in the early years of a leveraged property.
In the case of a homeowner, however, some of the better communities come
with HOA fees, like it or not.
The key is to make sure you factor in these fees when making a
purchasing decision. While many calculators don't include these fees, they
should. According to Investopedia,
HOA fees can range fro $200 to $400 a month. In expensive areas of the country,
the fees can go even higher.
3. Interest Rates
For any mortgage calculator to work, you need to know the interest
rate on the loan (you can find current
mortgage rates here). If you are just starting the search for a
home, you likely don't know the interest rate on your eventual mortgage. These
rates are affected by a number of factors:
Amount of the down payment
Your FICO credit score
Cost of the home
Location of the home
Type of mortgage
Getting the interest rate right is critical with a mortgage
calculator. Even a small difference in the rate can have a big impact on both
the monthly payment and the total amount of interest you'll pay over the life
of the loan.
For example, on a $300,000 mortgage, the difference between a four
percent and 4.5% mortgage rate is nearly $90 a month. Over the life of a
30-year mortgage in our example, the 4.5% rate will result in paying an extra
$32,000 in interest.
Mortgage interest on most owner-occupied homes is deductible for
those who itemize their deductions. The deduction has the effect of lowering
the effective interest rate on the mortgage. For example, a four percent
interest rate translates into an effective rate of three percent for those paying
25% in taxes at the margin.
Real estate taxes are also deductible. Depending on your marginal
tax rates, tax savings can be significant. Taxes are often ignored
with many mortgage calculators.
5. Closing Costs
Finally, closing costs are often left out of many mortgage
calculators. As the CFPB points out, however, closing costs can be significant.
These costs will vary based on the location of the home, purchase price, down
payment and other factors.
Bank of America offers a free closing
cost calculator (yes,
another calculator). Using the calculator and assuming a $500,000 purchase
price in Northern Virginia, the estimated closings costs exceeding $13,000,
broken down as follows:
Bank of America fees: $4,138
Third-party fees: $6,384
Estimated prepaid interest and insurance: $1,470
Estimated escrow account funds: $1,736
In some cases, the buyer may be able to negotiate to have the
seller pay some of these fees. The date of closing can also affect these fees
(the closer to the end of the month, the smaller the prepaid fees). But one
should not underestimate the closing costs. They are significant.
Mortgage calculators can be an excellent way to start the home
buying or refinancing process. But keep in mind that they are only as good as
the data you provide them. For a complete picture, make sure to account for
each of the factors above, and recognize that early in the process you may not
have all of the data you'll ultimately need to generate an accurate estimate.
By Rob Berger
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