What mortgage payment calculators can’t tell you
by Shawn Carvin, Senior Mortgage Banker
When you’re researching home loans online, you can find mortgage payment calculators that will supposedly tell you how much of a mortgage you can afford. But these mortgage payment calculators are—like many tools available on the internet—imperfect at best. They only tell part of the story. To truly gauge the affordability of a mortgage, you have to look at some of the additional costs associated with buying a home and think about the uncertainties of the future.
How monthly mortgage payments are calculated
When you use a mortgage payment calculator to determine how much of a home loan you can afford, you’ll find out the upper limit of your budget. This will be based on a payment of approximately 35% of your monthly income. However, this isn’t necessarily the ideal payment for you. For starters, ask yourself if your lifestyle is compatible with that much of a payment and whether you are going to be able to commit a reasonable amount to emergency savings each month. It’s probably wiser to go with a monthly payment that’s about 30% of your monthly income or even as low as 25%, to give you greater financial flexibility.
Expecting the unexpected
Life is full of uncertainties, and it’s best to venture into home ownership as prepared as you can be for the inevitable. Even if your new home is move-in ready, there may and probably will be unexpected expenses that you’ll have to handle. Everything may look great and be completely up to code during your home inspection, but you can never absolutely guarantee that something won’t need repair or replacement. A new appliance may only cost you a few hundred dollars, but HVAC repair/replacement can run $1000 or more, and a new roof can cost $10,000 plus. A home warranty might cover some of these expenses, but you could still find yourself tapping into your bank account to make repairs. Mortgage payment calculators don’t take these unexpected but inevitable expenses into account.
Income loss or reduction
Are you prepared for a potential period of unemployment? It’s smart to have enough in savings to get by for a few months while you find a new job. You also might not be able to maintain the same income level with a new position, so you may end up being very grateful that you went with a monthly payment that was lower than the maximum recommended for your former income.
Making your mark on your new home
More than likely, there will be at least some aesthetic changes you want to make to your new home in the first few months. The cost of painting and even the most superficial changes will add up. Or you might find out that you just can’t get by without making a more significant upgrade. Plus if you’ve been living in an apartment, you’ll probably need some new or additional furniture, along with equipment and tools to take care of your home and yard. A mortgage payment calculator can’t help you be sure you are ready for these expenses.