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When 2+2=5: How mortgage calculators are misleading

Mark Henricks
Online mortgage calculators are free and easy to use, yet many fall short of giving all the information you need to estimate a house payment.

House shoppers hurrying to find dream homes before interest rates go higher often turn to online mortgage calculators offered by personal finance and real estate sites to get a feel for just how dreamy a home they can afford.

When they do, they risk getting bad information, experts say.

"Most online mortgage calculators fall short of giving all the information you need to estimate a house payment," said Bob Harkson, a certified financial planner with Phase 2 Wealth Advisors in Gig Harbor, Washington.

Philip A. Seagraves, an economics and finance professor at Middle Tennessee State University Jones College of Business puts it more pungently.

"My opinion of the online calculators is that they're really just click-bait to get people to a mortgage site," Seagraves said.

What calculators omit

Calculators often leave out important costs and provide inaccurate estimates of others, according to critics.

"Taxes, insurance, homeowner association dues or condo management fees, utilities and general maintenance are variables not accounted for in traditional mortgage calculators," said Sonu Mittal, head of home mortgage lending for Citizens Bank in Providence, Rhode Island.

Property taxes are often the biggest omission. Many online calculators have only three input fields — mortgage amount, interest rate and number of years. The resulting payment includes only principal and interest.

Yet monthly payments usually include a sizable contribution to an escrow fund for annual property taxes. Property taxes vary significantly depending on local tax rates, but can amount to thousands of dollars a year, adding hundreds a month to the mortgage payment.

Insurance is another important item often skipped. The costs of a homeowners' insurance policy is usually also collected monthly into an escrow fund from which the annual premium is paid once a year.

"Not only property and casualty insurance but, depending where you live, it may require hurricane or flood insurance," Harkson said. All told, insurance premiums may add hundreds of dollars a month to a monthly payment.

Homeowners association fees are frequently the next-biggest item calculators miss. Many single-family homes are not governed by associations and so have no fees. Others may owe fees of just a few dollars a month. But some condo associations and high-end master-planned communities require payments that, again, can come to hundreds a month.

Private mortgage insurance may be required for loans when borrowers don't put down at least 20 percent. With annual premiums amounting to as much as 1 percent of the loan amount, this too can easily make the difference when it comes to affordability.

In addition to these common costs unaccounted for by many mortgage calculators, monthly payments may also include points and other closing costs that aren't paid in cash at closing.

Finally, although they're not part of the mortgage payment and can vary widely by individual property, utilities and repair costs should also be considered by savvy homeowners when deciding how much they can afford to spend.

Home shoppers armed with less-than-accurate payment estimates are setting themselves up for failure. "They may find that they do not qualify for the loan or for the house they're interested in until it's too late in the game," Mittal said.

Even worse, they may qualify for a loan that they later find they can't afford because their estimates were off. "When you have variables in a model that can go up or down and all are wrong on the downside, you have a big problem," said Seagraves.

Compensating for calculators

Online calculators are hardly the last word when it comes to figuring out your payments. Mortgage brokers and lenders are legally required to give borrowers a loan estimate form that includes estimated taxes and insurance as well as interest and principal payments.

Borrower should get the loan estimate within three days of submitting an application. This is still an estimate and borrowers won't know their actual payment to the penny until closing.

Yet the lender's loan estimate is probably more accurate than any online calculator.

Until they get their loan estimate, home shoppers can work around the shortcomings by picking the right tool.

Seagraves says he hasn't found any online calculators that do the math incorrectly. But only a small number allow you to input figures for these often-overlooked amounts.

Online calculators recommended by real estate finance experts for their ability to include a wider range of costs include those at Bankrate, NerdWallet, DinkyTown, Realtor and Zillow.

In the end, Seagraves advises against any online calculator. He favors spreadsheets.

"The most elementary spreadsheets that run on Android or iPhone devices can do a better job of calculating mortgage payments than the online calculators," he said.

Even the best calculators require accurate, current figures for taxes, insurance and other costs. Mark Burrage, executive director of mortgage digital experience for USAA in San Antonio, says the best results require figures specific to an individual house.

"Until you actually have a property, it's difficult to get down into all the costs," Burrage said. To get it all he suggests carefully scrutinizing the property listing and quizzing real estate agents, taxing authorities, insurance brokers and the current owner.

Calculators are useful for comparing interest rates, Burrage says, but they are rarely definitive and often give only a small picture of what the ultimate payment will be.

"They don't miscalculate," Seagraves said. "They just mislead."