Have you even used an online mortgage calculator to see how much it would cost you per month to buy a house? If you have, you may have marveled at how cheap these calculators say it is to own your own home.
The monthly payment looks so cheap because most of these calculators don’t tell you the whole story about owning a home. Sure the calculators are correct, but they leave out important pieces of information that you will probably want to know before you jump into a huge purchase.
How Much Interest Will You Pay?
Mortgage calculators, bankers, car salesmen, and plenty of other people prefer to discuss your loan in terms of your monthly payment. Usually they don’t like to bring up how much the interest rate is or how much total interest you’re going to pay over the life of the loan because most of the time it isn’t very pretty.
If you are looking at a $150,000 mortgage over 30 years with a 4% interest rate, the calculator will tell you it’s only $716.12 per month. Sounds like a great deal! However, it fails to mention that you would pay a total of almost $108,000 in interest over the course of the loan. That type of information might have you think twice about getting such a long mortgage.
What are the Other Home Expenses?
A mortgage calculator does exactly what its name suggests: it calculates mortgage payments. It does not calculate the monthly cost of owning a home. You have to take into account all of the following expenses:
- Property Taxes
- Closing costs that may be rolled into your payments
- Homeowners Insurance
- Private Mortgage Insurance, or PMI (if you don’t have a 20% down payment)
- Home Owners Association (HOA) or Condo Fees
- Maintenance Expenses
- Higher utility bills to heat and cool a much bigger space than an apartment
- Gas for the lawnmower you never needed at your apartment
- Etc, etc, etc.
I have nothing against mortgage calculators. I am actually a huge fan of anything that does complicated math for me. However, it’s important to understand those calculators are only giving you the cost of the mortgage, and not how much it would take to move into that house.
Use Calculators and Personal Finance Resources Wisely
Calculators are a good resource. So are friends and family that own houses. A banker or real estate agent that you can trust is a great resource. Even some personal finance bloggers can help every now and then. Just make sure to use all the resources at your disposal when you are making a big decision like buying a house.
Readers: If you own a home, how much of your monthly home expense is paying your mortgage? My uneducated guess is going to be about 70% on average.