4 Mortgage Calculator Traps to Avoid

Jul 17, 2018 | Finance, Loans

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.

In fact, there are several traps to avoid when using a calculator to make home purchasing or refinancing decisions.

1. 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 potential payments.

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.

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
  • Your income
  • Your debts
  • Type of mortgage

4. Taxes

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.

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