Mortgage calculator applications are great tools for providing needed data when making critical financial decisions like buying a home.  They help us know how much a house we can afford, estimate our mortgage payments and how/when to save money on a refinance transactions.

To get the most out of mortgage calculations, make sure to factor in the following factors:

  1.  Include all elements that go into a mortgage payment…the principal and interest payments, home insurance, real estate taxes on the home and private mortgage insurance.  By including everything in your monthly “mortgage” payments, you are not understating your monthly costs of home ownership.
  2. Home Owners’ Association fees…according to Investopedia, HOA fees range between $200.-$400./monthly.  Fees are higher in more expensive parts of the country.
  3. Interest Rates…are affected by a myriad of issues such as
    1. amount of your down payment
    2. your FICO credit score
    3. the cost of the home
    4. the location of the home
    5. your income
    6. your debts
    7. the type of mortgage
    8. Any slight difference in interest rates has a huge impact on the amount of interest you may pay.  For example, the difference between the rate of 4% and 4.5% on a $300,000 mortgage is $90./month and $32,000 in a 30 year mortgage contract.
  4. Taxes…Mortgage interest is usually deductible for people who itemize their deductions.
    1. A mortgage interest deduction essentially lowers your effective interest rate on the mortgage itself so that a 4% rate effectively becomes a 3% rate for people paying 25% in margin taxes
    2. Real estate taxes are also deductible.  These taxes are often not included in mortgage calculator projections.
  5. Closing Costs…are also not included in mortgage calculator projections and add up based upon issues such as
    1. the location of the house
    2. the purchase price of the house
    3. the downpayment of the house
    4. other issues based upon each lender and situation…for example, Bank of America did a cost calculation of a $500,000. home in North Virginia and came up with an estimate of approximately $13,000. that included fees of $4,133. paid to the bank, 3rd party fees of $6,384, prepaid interest on insurance of $1,470. and escrow costs of $1,736.  All of these closing costs may be negotiated between the buyer and seller of the house so make sure you have a good real estate professional advocating your position.

Obviously, mortgage calculators are a good beginning tool to estimate costs of home ownership.  However, to get a more accurate sense of costs associated with home ownership, factor in the costs and implications of all the above elements in order to understand, and not be surprised by, the financial realities of home ownership.  In addition, you should always work with a trusted mortgage professional to get the most accurate numbers for the home you’re looking to purchase.