February 4th, 2010 9:27 AM by Preston Ware
When it comes time to crunch the numbers concerning your next home purchase or if you are pondering the benefits of a refinance let the “mortgage calculators” section of your favorite web site help you analyze the benefits of your new home or lower interest rate. Nowadays, thanks to the internet and technology we have so many more tools that help up understand the benefits of the loan and the interest rate we are getting. Right at our fingertips we can calculate mortgage payments, tax savings, break-even points, whether to buy or rent, how much house to buy, etc. It is important to use the tools correctly because a wrong input will produce wrong output and everybody knows that a wrong number is a lie.
Here are a few things to keep in mind.
If you are pondering whether to purchase or rent, go to the Rent vs Buy calculator. Put zero in for price appreciation of the home as a starting point. Fill in the numbers for a modest home. I am willing to bet that your estimated mortgage payment is lower than what you are paying for rent. With interest rates in the fives and already discounted home prices, you can’t miss. This will motivate you. Now go over to the mortgage tax savings calculator and punch in your tax bracket and projected payment. For example, a modest loan of $100,000 at an interest rate of 5.25% with a 20% tax bracket will save the homeowner another $1243 per year. After seeing this, go back to the rent vs buy graph and lower the mortgage payment by $100. Look good? Now go back and start playing with the appreciation field for the purchase and the numbers will really jump out at you.
Looking at the mortgage qualifier calculator, required income and maximum mortgage calculators, I noticed that the system default is strict. My system used debt ratios of 28/36 which are the numbers FHA likes to see. Having worked in the mortgage industry for 15 years I can tell you that many customers get away with much higher debt ratios. In other words you probably can borrow more if you want to. Whenever we process a mortgage, the loan is run through an automated underwriting engine that weighs all of the factors of the loan including equity in the transaction, reserves and credit that can offset higher debt ratios. Although these sections are helpful, I would rely on the advice of a mortgage professional for these answers. Determining the household budget not only takes into account ratios but it also involves knowing what income we can use to qualify. This is what we do before we issue the pre-approval letter before you go shopping with the realtor.
The refinance interest savings calculator and refinance break even calculators are excellent tools to use when considering a refinance. I found these tools somewhat limited because on my system there was no room to consider cash flow savings from paying off credit cards or a second mortgage. A 15 vs 30 year mortgage calculator will demonstrate the power of interest and why banks are happy when you select a 30 year fixed over a 15 year fixed.
Of all the calculators that I looked at, the one that appears to be the most misleading is the adjustable rate mortgage calculator. With the low cost of money, adjustable rate mortgages have sort of made a comeback in the last year or so. Today’s adjustable rate mortgages are not as “dangerous” as the sub-prime adjustable rate mortgages sold previous to the sub-prime meltdown because the margins are low. When I went into my calculator the default change rate from one year to the next was .25% . This is misleading. Whenever an adjustable rate mortgages gets out of the fixed period the interest rate is at the mercy of the index and the margin and the caps. Caps can be either 1, 2, 3 or 5% in a given year. It is wise to over estimate and be conservative by predicting changes of at least 2% when the interest rate adjusts.
Years ago there was talk that appraisers might be replaced someday by automated valuations and now we see that their job is more important than ever. This is similar to the way I feel about using mortgage calculators. They are an awesome tool that you can use in the comfort of your own home but it is still necessary to consult a mortgage professional to fill in the blanks and make sure the correct numbers are going in.