“How we think shows through in how we act. Attitudes are mirrors of the mind. They reflect thinking.” – David Joseph Schwartz
Years ago, people used charts and simple multiplication to calculate the time value of money. Then, Hewlett-Packard introduced its ubiquitous hand-held financial calculators, and those “time value of $1” charts faded from memory. The latest incarnation is the Web-based mortgage calculator, provided online by real estate brokerages and agents, lenders and mortgage brokers and such companies as Bankrate Monitor and Nolo Press, among others. Calculators pose intriguing questions: How much can you afford to borrow to buy a home? How much will your monthly mortgage payment be? Should you refinance your mortgage? And so on.
Do mortgage calculators work? Yes and no. Calculators plug user-entered data into complex equations that would be daunting for the average not mathematically inclined person to solve by hand. However, the results lack real-world reliability and can vary from one calculator to the next. Some calculators are so suspect, in fact, that they’re accompanied by small-print disclaimers warning consumers not to rely on the results. If you want to use online mortgage calculators, keep these caveats in mind:
Mortgage calculators rarely reveal their behind-the-scenes assumptions.
Few mortgage calculators are accompanied by any explanation of how they work or what assumptions are used. Does the monthly payment include mortgage insurance, if required? Does it include an impound account for property taxes and casualty insurance? Is the equation adjusted to reflect a higher interest rate on a jumbo loan or a non-owner-occupied property? The more questions you’re asked before you click “calculate,” the more reliable the outcome is likely to be, but that’s assuming the information you enter is correct.
Mortgage calculators can’t predict payments on hybrid or adjustable-rate mortgages (ARMs) beyond the initial fixed-rate period.
The interest rate on a traditional 30-year mortgage is a fixed constant that can be plugged into an equation, but the interest rate on a hybrid or ARM is unknown beyond the first adjustment, which might occur in one month, six months, a year, three years, five years or 10 years, depending on the mortgage. There’s no way for a calculator to account for this unknowable factor. Some calculators tackle the worst-case scenario. That’s useful up to a point, but again, the reliability of the results still depends on secret internal assumptions and formulas and the accuracy of user-entered data.
Refinance calculators usually ignore the longer term on the new mortgage.
Many people refinance their existing mortgage with the goal of lowering their monthly payments. However, if you’ve been making payments on your existing mortgage for some time and the new mortgage will be amortized over a full 30 years, refinancing can cost more over the lifespan of the loan even if the monthly payments are lower. Mortgage calculators that purport to show whether you should refinance tend to focus on the monthly payment and the payback period for the refinancing costs, while ignoring the longer term of the new mortgage. This flaw is fatal.
Mortgage calculators can be fun and possibly educational.
The positive side to mortgage calculators is the ability to make rough comparisons among various scenarios. Plugging different numbers into one calculator can give novice borrowers good insights into the interplay between the cost of the home, the interest rate, the downpayment percentage and the monthly payment. But again, it’s important not to make real-world decisions solely on the basis of these numbers