What Monthly Mortgage Payment Calculators Aren't Telling You

Have you ever used those simple monthly payment estimators on real estate websites? Have you ever been pleasantly surprised, based on those calculators, to see that you can afford a lot more house than you thought?

Tread carefully.

While basic monthly mortgage payment estimators might be helpful to establish a baseline cost, you should almost always plan on your actual monthly payment being higher—and maybe even significantly higher. Let my own house serve as an example.

When I initially looked at the property I ended up purchasing, an online estimator showed my payment would be a whopping $600 cheaper than it actually turned out to be upon purchasing. In fact, it was only marginally more than what I was currently paying for rent at that time I was over the moon. I thought, “Why didn’t I buy a house sooner?” 

Fast-forward to putting in an offer and ultimately being approved for a loan by a lender. I was shocked when the bank gave me its own monthly payment estimate based on fact, not assumption. I was even more shocked when the number kept climbing due to property taxes, homeowners insurance, and private mortgage insurance, all of which are a part of escrow. Now that my home has sold, the estimator updated its algorithm and has a new estimated monthly payment listed—it’s off by $249. 

This cautionary tale can be empowering for homebuyers. Here are two things monthly payment estimators aren’t telling you. Factor them in on your own for a more realistic expectation of what your mortgage will cost you each month.

Interest

Online monthly payment estimators have no way of knowing what your interest rate will actually be. Most will pre-fill that amount with the average monthly fixed rate. Yours may be higher depending on your credit score. It also may be lower.

Escrow

Escrow is a mysterious word fraught with financial pitfalls. Essentially, escrow refers to money set aside by the lender to pay required fees on your behalf. You may end up paying some of that money during closing. Anything leftover will be collected monthly and rolled into your monthly mortgage payment. Escrow helps cover costs of the homeowners insurance, private mortgage insurance, and property taxes, all outlined below.

Escrow has its upsides. It prevents homeowners from navigating tedious extra payments: All you’ll need is one monthly payment to your lender. However, some homeowners may not like the fact that they’re not managing individual payments to insurance companies, and lenders make money off of escrow, charging premiums for their services.

Note: If you’ve put more than 20 percent down, you can avoid escrow if you choose, although you’ll likely have to pay a waiver fee. (Repeat: Lenders make money off of escrow.)

Homeowners Insurance

If you’re using a lender to help with the purchase of your home (most people are), you’re required to pay homeowners insurance. The premium will depend on factors such as the size of the home, age of the home, and its geographical location.

Private Mortgage Insurance

If you put less than 20 percent down on a home, you’ll be required to pay private mortgage insurance (PMI). That’s yet another monthly fee to insure the mortgage itself and lessen the risk for lenders in case you default on your payments. PMI drops off when a loan balance gets to 78 percent of its original value.

You can also request refinancing if your home’s value increases. But beware: When your home’s value increases, so do your property taxes.

Property Taxes

These can be a doozy, and they can change from year to year. Perhaps your state or county undergoes major budget cuts to necessary areas like the fire department or public schools—they’ll raise property taxes to make up the difference. Or maybe you’ve put in major upgrades to your home in order to change the loan-to-value ratio and get rid of PMI. You’ve just increased the value of your home, which will increase your property taxes too.

Location is also a determining factor in your property taxes. Did you buy in the best neighborhood your city has to offer? Expect to pay a premium. Same goes if you live adjacent to recreational areas like a lake, golf course, or park.

A Decent Monthly Payment Estimator

Neighborhoods.com offers a free estimated monthly costs calculator that accounts for principal and interest, property tax, property insurance, private mortgage insurance, and HOA dues. Simply browse the properties listed in your favorite neighborhood, click on a home that catches your eye, and scroll past the property details to view the estimated monthly costs of your dream home. The down payment percentage can be adjusted as well as the interest rate and loan duration.

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