Imaging you’ve just signed the paperwork and received the keys to your new piece of Chicago, IL, real estate. You move in and finally begin to enjoy having a place of your own, until you receive the first bill from the lender who underwrote your mortgage — and the amount you owe is far more than what you budgeted for.
Since a mortgage isn’t something you can just take back to the bank if you change your mind or realize the monthly cost is too high, it’s important to do everything you can to avoid a big mistake by factoring all variables into your estimates.
1. There’s more to your monthly mortgage payment than principal and interest
Most people understand that there are two parts to the monthly payment you make to repay your home loan over time: the principal and the interest. The principal goes to repay the actual amount you borrowed. The interest acts as the fee on the sum of money borrowed and will vary depending on your interest rate. But your mortgage payment will consist of more than just principal and interest. Other monthly expenses are rolled into your home loan that you need to factor in when determining how much home you can afford.
“Deciding on a mortgage isn’t only about how much interest you’re going to pay over the life of the loan,” says Eric Roberge, Certified Financial Planner and founder of financial planning company Beyond Your Hammock. “You have to take into account taxes and insurance to understand how much you’re going to be paying each month. Only then can you decide what you can truly afford.”
2. Choosing the right type of mortgage is key — and a mortgage calculator will help
When lenders underwrite your loan, they include taxes on your home and the insurance policy you take out. Both your property tax and your homeowners’ insurance payment will impact how much you pay each month on your mortgage; these aren’t separate bills.
It’s critical, then, that you use the right mortgage calculator when researching the financial side of purchasing a home. If you don’t use a mortgage calculator with taxes and insurance factored in, your results will most likely reflect a monthly payment that is less than what you’ll actually owe each month. If you base your home-buying budget on a number that doesn’t include all the expenses, you could end up with a loan that has monthly payments you can’t afford.
3. You’ll get a more accurate estimate of your monthly mortgage payment
A mortgage calculator with insurance and taxes will provide you a more accurate estimate when you’re shopping for a home. This will allow you to budget appropriately and understand what to expect when you need to make that first mortgage payment. It can also prevent you from getting in over your head with a too-large mortgage that you struggle to repay.
Research is key when you’re taking on such a big financial responsibility, so don’t hesitate to use various resources to double-check your numbers. You can search out calculators that specifically provide estimates for homeowners’ insurance in your state and specific location. Do the same with a property tax calculator too.
Ultimately, any calculator is only as good as the data you provide. Beyond using calculators, work with a trusted financial professional, like a fee-only financial planner, to help you plan out this big purchase before you take on a mortgage.
Have you used a mortgage calculator to budget for your next home? Share in the comments!