The 5 Dangers of Mortgage Calculators

Online mortgage calculators are widely used by first-time homebuyers, but they are one of the most dangerous financial tools because they provide misleading information. The output of a tool like this is only as good as its input, and it’s nearly impossible to expect that a homebuyer, much less someone doing this for the first time, will calculate the inputs accurately.

1. Income Calculations are More Complex than You Think
   1. Even the most basic income calculation can be miscalculated. For example, are you paid bi-monthly or are you paid every two weeks? This can change how your total income is calculated by a mortgage underwriter. Moreover, the logic used when calculating bonus or commission income is far more complex because you need to factor historical performance and mortgage underwriters are also able to use “compensating factors” when determining if they use an average of the last two years, the most recent year’s total or if they don’t allow it at all. Lastly, similar logic exists for those who earn an hourly wage.
   2. Accuracy Rating: Medium
2. Calculating Monthly Debt is Guesswork
   1. The logic used to calculate a borrower’s monthly debt can be even more complex than what’s used to calculate income. For example, credit card debt is based off of the minimum monthly payments required and has nothing to do with the outstanding balance. This is just a basic example. Calculating student debt (are you in repayment or not), car loans (do you have more or less than 10 payments left) and is your mortgage (your existing or a new one) going to be a fixed rate or adjustable rate?
   2. Accuracy Rating: Low
3. Your Credit Score is a Game Changer
   1. Your credit score can have a major impact on your monthly payments. This is not only true when determining what interest rate you should use, but it also has a material impact on your monthly payment if your down payment is less than 20%. The majority of borrowers putting less than 20% down use Private Mortgage Insurance (PMI) to secure financing. PMI rates are determined by your credit score, so if you’re just one point off, you can have the wrong input. What’s more, all lenders rely on the FICO 2 Model to determine your score. The free credit report services rely on different models, which can result in score variances of as much as 20 points.
   2. Accuracy Rating: Low
4. Property Info Must be Detailed
   1. Just like every borrower profile has nuances, so does the property your buying. There are costs associated with each property that need to be factored (e.g. homeowners association fees, special assessments, etc.). Moreover, you need to make assumptions about the cost of your homeowner’s insurance, which can have a material impact on your monthly payments. These calculations vary by property and occupancy type as well.
   2. Accuracy: Medium
5. The “Other” Variables Are Overlooked
   1. There are countless other variables that must be considered by an underwriter and the calculations used by an underwriter can vary by lender. For example, the type of loan can impact your ability to qualify. This applies to the loan on your future mortgage (or your existing one if you are already a homeowner). Moreover, there are other factors that most people overlook like gifts, car payments made by parents, alimony, and many more. If you don’t include or omit these obligations your ability to qualify or the amount you can qualify for can be materially impacted.
   2. Accuracy: Low

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