MORTGAGE CALCULATORS . . . ARE THEY RELIABLE?

Updated:         May 19, 2018

Web-based mortgage calculators have proliferated during the past several years. The calculators "suggest" that they assist a potential borrower answer various financial questions: How much will monthly payments be? How much can one afford to borrow when purchasing a home? Does it make sense to refinance one's mortgage? What happens when "extra payments" are made to a mortgage? In other words, real estate calculators allow borrowers to "test" various financial scenarios.

An initial review of various real estate calculators indicate, that while fun to experiment with, borrowers need to be cautious about relying upon their results. Few mortgage calculators are accompanied by an explanation of what assumptions are used in their calculations. Let's examine what must occur with a calculator designed to assist a prospective borrower pre-qualify oneself. Most calculator programs identify the "typical" qualifying ratios that prospective borrowers "should" meet to be eligible for a loan.

Unfortunately, there are numerous variables that must accompany such a qualification. For instance, does the calculation include mortgage insurance, if required? Does it include the tax and insurance calculation for an impound account when required? The more questions you are asked before you click "calculate", the more reliable the outcome is likely to be, assuming the accuracy of the information you entered.

Perhaps even more importantly, with the advent of automated qualifying systems accompanied by the continued reliance upon credit scoring (see "credit scoring" tip sheet), the "normal" qualifying ratios often do not apply. Our anxiety, then, is that borrowers using a real estate web calculator may believe erroneously they are either qualified for a loan or unable to acquire a real estate loan.

Most persons today are seeking information regarding the traditional 30 year fixed rate mortgage loan. If, as identified above, the results of real estate calculators are suspect even with these fixed rate loans, imagine the complications that are likely with an adjustable rate mortgage or a "hybrid" mortgage (I.e.; a loan with a fixed rate for only one year, three years, five years, etc.)? There is no way for a calculator to account for all the possible variables. The best that some calculators can do is identify a worst-case scenario. While useful up to a point, again, the reliability of the results depend upon the calculator's internal assumptions and formulas coupled with the accuracy of the user-entered information. It is easy to see that dependable results are unlikely.

There are many other scenarios in which a web-based calculator could provide unreliable results . . . when a jumbo loan is required or when evaluating whether the borrower needs a sub-prime or niche type loan. The programs seem to be unable to accommodate the varying Private Mortgage Insurance (PMI) requirements depending upon the down payment amount provided (i.e.; using 97%, 95% or 90% Loan-to-Value financing). Finally, there are few calculators available to calculate FHA or VA finance options.

The positive side to mortgage calculators is allowing borrowers to make rough comparisons among various scenarios. Reviewing the interaction between the cost of a home, the interest rate, the down payment and the monthly payment can be instructional as well as fun. So, while real estate calculators (especially those designed to "qualify" buyers) are easy and fun to use, reliance upon them for qualification purposes could result in some prospective borrowers disqualifying themselves unnecessarily or mis-believing that they are qualified. Either result would be unfortunate. Thus, it is important that every prospective borrower contact a mortgage lender rather than merely rely upon a mortgage calculator's interpretation.

Humboldt Home Loans sees no reason to duplicate information that is already available elsewhere on the internet. While there are many web sites offering finance calculators, you may want to explore the following web sites for your introduction to real estate calculators.

www.calculator.net

You will find variety of finance calculators but remember the cautions advised above.

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