Top Ten Mistakes People Make When Using a Mortgage Calculator
How to use a mortgage calculator.
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Set your expectations for a new mortgage the right way.
If you have ever thought about buying your new home, getting cash out of your home, or lowering your payments on your home, you may have tried to estimate your payments using a mortgage calculator. If you really want to get an accurate picture of what your new payments will be, this might be the most important information you will read.
Imagine shopping for a new home for weeks or months, only to find out that the payment in reality is $500.00 more than you estimated and you have to start looking again from scratch. Unfortunately this is all too common, but completely avoidable if you keep in mind some of the tips you will find here.
Recent FED Rate Cut
Don't get confused by mortgage rate advertisements.
It certainly does not help that the advertising for mortgages is everwhere, and most of it is selling a payment that really could be misleading. "$300,000 loan for just $1000.00 per month" is a common advertisment. If you see than enough, it makes it appear standard for mortgages....and when "Fixed rates as low as 4.8%!" appears in the same small ad, you can see why some people could have an unrealistic expectation on what a mortgage payment might be for a particular loan amount. So here are the most common mistakes you can make and how to avoid them when using a mortgage calculator.
1. Using unrealistic mortgage rates to calculate a mortgage payment.
A mistake you can make is using advertised interest rates for calculating. There are occassions when advertised interest rates are not what they appear, and certainly the rates posted in an ad are the absolute best case scenario. They may be obtainable, but the point here is to prepare yourself for the most likely outcome - if you do better in the end, then it's a bonus!
Now, finding the best mortgage rates is a topic completely on it's own, for which I will be doing a future hub, so we won't go deep on this here. For simplicity here is a safe place to look for a mortgage rate on which to base your calculations.
Freddie Mac, along with Fannie Mae, are the two entities that purchase the large majority of mortgage loans in the United States. They set guidelines that most lenders and banks follow when making loans, and they are the most desireable interest rates typically. Freddie Mac post every week a national average of loans that are actually being delivered, not just advertised. So this is a good solid number to use that can be relied upon. They do post rates for 30 year Fixed, 15 yr Fixed, 5/1 ARM's, and 1 Yr ARM's.
Other common mistakes.
2. Using a rate that is not available on the type of loan you really want.
Many people make the mistake of using the last rate they saw or heard in an advertisement. “Fixed rates as low as 4.5%” could mean a 15 year fixed and not a thirty year, which you really want. The one that can be really confusing is “Fixed Payment Rates as low as 1.5%”. Just be sure that the rate you are using is a rate available on the program you really want.
3. Forgetting the “rest of the story…”
As Paul Harvey says, the rest of the story in this case is the other things that make up the rest of the payment. PITI is the common an acronym for Principle & Interest, Taxes and Insurance. Most mortgage calculators are going to figure the P & I, and leave the rest to you.
4. Using the wrong number for property taxes.
If you are refinancing, and not making any improvements to the property, the good news is that your refinance should not affect your property taxes. Just because your lender will evaluate the market value of the property, this does not trigger your property tax office from re-evaluating the assessed value of your property in most cases.
If you are looking at purchasing a new home it may not be wise to look at the tax bill that the current owner has been paying and assume you will paying that once you become the owner. Sometimes the owner may be taking advantage of some type of tax exemption that may be keeping the assessed value low, and when you purchase the property you may not qualify for the same exemption. If you are buying new construction the tax bill might be based on the fact that there is no home there, and need to be adjusted up based on the new home you are having constructed. Most counties have a property appraiser’s office which can be contacted to get a realistic expectation of your future tax bill, based on what you might pay for the property. Many appraisers’ offices have websites with this information, and even some tools and calculators to help for this very reason. A simple Google search can help you find your local office.
5. Under-estimating property insurance rates.
A simple phone call to your local property & casualty insurance agent can help you avoid big surprises when it comes to your insurance bill. Try to let them know as many things about the property you are interested in if you are still in the shopping phase of a transaction. The age of the property, type of construction, and location all play important factors in determining your premium amount. If you get a quote in the beginning based on a concrete block home built two years ago in the suburbs, be prepared for a higher premium for a 80 year old wood frame home located on the beach. The more information you give them the better prepared you will be.
6. Not taking into account any additional insurances required by a lender.
Will you be required to purchase any “additional” insurance types relevant to the area? In Florida, windstorm and flood insurance is required in many areas. If you are buying in parts of California, your lender may require earthquake insurance. Asking an experienced real estate professional in combination with your insurance agent can get you some quick answers.
7. Not factoring in maintenance fees.
Are you buying in a development where there is a mandatory Home Owners Association (HOA)? Make sure to ask how much the fees are in a particular area. This information can readily be obtained from property owners there or from your Realtor. The amount of fees and what is included in them can vary widely from $50 per year for some houses to over $1000 per month and more for some luxury condominiums. Be sure to include in your budgeting calculations.
8. Neglecting to factor in closing costs.
If you are buying or refinancing you might make this mistake. On a refinance calculation make sure to add 3-5% for closing costs on top of what you owe when looking at a new loan amount. If you are purchasing a property, make sure to allocate a portion of the money you have set aside for purchasing to cover the closing costs. For example, if you have $20,000 to purchase, and you are buying a $100,000 property, do not assume you will have an $80,000 loan. You may have to set aside $5,000 for closing costs, which would mean you would be borrowing $85,000. This can lead to a huge difference in payments as now you may be borrowing over 80% of the property and have additional costs not explained by a mortgage calculator.
9. Your payoff is not the same as your balance. (For refinancing)
If you are looking a mortgage refinance, don’t just use the balance on the last statement to do your calculation. You should add about another payments worth on top of that to represent your actual payoff on your loan. You see, there has been interest accumulating on the loan since the last payment you made. This is not a penalty, though, as it represents the payment you often get to “skip” when you refinance. If you want to keep your balance the same you could bring the regularly scheduled payment to the closing of the refinance, although many do not choose to do so.
10. Not accounting for Private Mortgage Insurance (PMI).
If the loan you are going to take out is going to be more than 80% of what the lender says the value of the property is, then you will have to factor in PMI or some sort of workaround. PMI is an insurance that protects the lender if you default on the loan. Calculating how much this will be for you specifically can be pretty involved. The determining factors are your credit score, your Loan To Value (LTV) ratio, and loan type. For those ambitious folks I will give you the most common way to calculate this.
First come up with your LTV ratio. You need the value of the property and your loan amount.
LTV = Loan Amount / Property Value
Example - $90,000 loan amount / $100,000 property value = 90% LTV
Now choose the appropriate PMI “factor” using the below chart:
LTV Factor (these represent the annual amount for the PMI)
80.01% - 85% .32%
85.05% - 90% .52%
90.01% - 95% .78%
95.01% - 100% .96%
Then take the factor, multiply times the loan amount, and divide by 12 to get the monthly PMI.
Using same example above: .52% * $90,000 / 12 = $39.00 / month PMI
So you certainly can do all of the above. It is better to prepare yourself for the reality of what you may be getting into with a new loan or home, rather than just winging it and hoping it will work out. It will save you some time working with an experienced, professional Loan Officer or Mortgage Broker, along with an experienced Realtor. As you can see, there are an awful lot of details involved in getting things right, and working with someone who is less than knowledgeable is not something you should consider on such an important transaction.
Please leave a comment or suggestion below before you leave. I hope you found this helpful!