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Online Mortgage Loan Calculators: Home Buyer, Beware!


Many first time buyers are looking for the answer to a very simple question - how much home can I afford to buy. There are many online mortgage loan calculators available to help would be homeowners answer that question, but it is important to exercise caution when using them.

It seems that virtually every mortgage lender has some kind of online mortgage calculator available on their web site (Try a mortgage calculator here). All the buyer needs do is enter his or her income, current debts and amount of savings, and the mortgage calculator is supposed to instantly provide the answer to how much home they can afford.

However, the number on the screen can be somewhat misleading, and it is vital to check several different mortgage calculators, as some can provide an overly optimistic idea of how much home you can afford.

For instance, a recent survey of various online mortgage loan calculators which used an income of $60,000 found housing affordability estimates that ranged from $150,000 to over $300,000. In most cases, however, it would be very difficult for a home buyer with an income of just over $60,000 to afford a $300,000 home.

Certainly, there may be a number of explanations for these overly optimistic mortgage calculators. One explanation, of course, is that lenders make more money when they write larger loans, while another explanation may be simply that the online mortgage loan calculators are designed to provide a ballpark figure only, not a final mortgage determination.

While online mortgage calculators can be quite a valuable tool for home shoppers, it is always a good idea to seek the advice of a third party before shopping for a home. Setting the right price range can be the first step toward buying a home, and it is a good idea to know how much home you can afford.

For many home buyers, the best step may be to use the online mortgage loan calculator as a first step, and then to follow up with a preferred lender to go through the actual mortgage pre-qualification and pre-approval process. Only by having your exact income, liabilities and assets on hand will give you the true picture of how much home you can truly afford.

Even though the price ranges on various mortgage calculators can vary quite a bit, that does not mean they are not useful tools. When used properly a good online mortgage calculator can be a big help, but it is important to remember that many lenders may have a vested interest in lending you as much money on a mortgage as they can.

It is a good idea to follow up that mortgage calculator with several different mortgage payment calculators a well. These mortgage payment calculators provide the estimated monthly mortgage payment based on a number of factors, such as the down payment, the price of the home, the interest rate and the number of years. Go ahead and enter the highest figure you received from those mortgage calculators you have tried, and take a look at the final number.

It is great if that bottom line figure is affordable to you. But if you feel those monthly payments would be too much of a stretch; then you should try to reduce your expectations and look for a less expensive home. While many experts recommend that no more than 30% of a homeowner’s gross pay should go to housing expenses, including mortgage payments, real estate taxes and insurance, there is no magic formula for determining housing affordability. How much is affordable in terms of monthly payments and yearly taxes will vary from individual to individual. Thus, it is important to consider your own circumstances.

It is necessary to understand how these online mortgage loan calculators work, as the estimates they provide are created using a two step process. The calculator first determines how much the borrower can spend on housing costs each month, based on the personal financial information provided. In the second step, the online mortgage calculator determines how much of each payment goes toward the principal, and how much of the payment is eaten up by fees and interest.

The calculation of interest and fees is generally quite consistent from company to company, but various lenders will program their online mortgage loan calculators with different assumptions about how much income can safely be spent on housing. While the general rule of thumb is 30%, many mortgage calculators stretch this rule quite a bit further, and some even assume it is safe for the buyer to spend more than half of his or her income each month on housing costs.

While this may be true in certain special circumstances, for most homeowners spending more than half of monthly income on housing is an untenable position. Even if the buyer has excellent visibility of income and earns a good living, spending that high a percentage on housing costs can be dangerous, and it is always a good idea to consider that fact when comparing various mortgage loan calculators.


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