Any renter with an internet connection and a passion for painting the walls dark green (or black or maybe just wallpapering a bit) can attest to the bit of confusion you feel when first encountering a mortgage calculator or payment estimator online.
You approach the thing with some very rough estimates researched in haste about what a modest little 2-bedroom in an up-and-coming neighborhood might cost. You give a not-totally-inaccurate number of what kind of down payment you might have, but, yeah, it's inflated just a little bit. (Maybe you'll get better at saving soon.) You have no idea even what interest rate to enter—you've got pretty good credit but haven't even gotten as far in this very informal home search as to google a little bit about rates—so you use the default one in the calculator. You push the button and find that the number it spits out for your future mortgage payment on your lovely little 2-bedroom condo on the East side of the city is... well, it's doable. Too doable, you realize. Why isn't everybody buying a home?
That number an online mortgage calculator will give you is just one piece of the full picture of what it costs, monthly, to buy a home. (This is to say nothing of the other expenses involved, like a down payment and closing costs, plus the ongoing maintenance of being king of your own domain.) The calculator is estimating just your principal and interest payment ("P&I") based on all the factors you punched in—that's just what you have to pay back to the bank in exchange for them loaning you more money than you've ever seen in your life. On top of that there's possibly mortgage insurance (if you're making a down payment under 20 percent), and definitely homeowner's insurance and taxes, which are likely collected in this thing called an escrow account where your lender collects the taxes and premiums from you and pays those bills on your behalf.
What an Actual Mortgage Payment Can Look Like
To show you how much those other expenses can add up on top of what seems like a doable number that the calculator gives you, I thought I'd share my actual mortgage, in very real numbers.
My husband and I bought a 2-bedroom loft in Atlanta last May, our first home after many years of renting both separately and together. A monthly mortgage payment involves lots of little forever-moving parts and pieces, but here is a snapshot of what our 30-year, fixed-rate mortgage payment looks like right now at almost one year in:
Principal and Interest: $1,385.87
Mortgage Insurance: $147.13 *
Monthly Escrow: $409, includes the below:
- Insurance: $42.17
- Property Taxes: $87.02
- City Property Tax: $279.81
Homeowner's Association Fees: $250 †
Total Payment Each Month: $2192
* We'll own 20% equity in our home by November 2023, and that's when PMI (private mortgage insurance) goes away. Until then, this is a necessary monthly expense for us.
† This is technically not part of our mortgage payment, as it's a separate bill that is paid to our loft's association and not to our lender. But for our specific household budget, we keep this expense in the same bucket as our mortgage. If you're thinking about the affordability of a condo, you need to factor this in, too.
Principal and Interest
In a fixed-rate mortgage, your P&I payment (the figure most mortgage calculators tell you) will never change, although the proportions of it going respectively to paying the principal loan and interest will. Over the past 9 months, an average of $458 of our P&I payment has been going to our principal, and $928 to interest. That ratio will consistently move more in our favor over time—though it does take a long time. We'll be paying our principal loan down by about $500 per month after 3 years of owning our place, and it will take 20 years until we're paying $1,000 a month towards the original loan.
So, yes, right now only 450-ish dollars of our $2,192 monthly housing expense is money we're not "throwing away," to use a phrase often cited by wary renters. That 20-ish percent of our total monthly housing expense is the only part going back into our pockets in the form of home equity. The rest is interest, plus the other taxes, insurance and fees.
The expenses beyond P&I vary from place to place and buyer to buyer. Your mortgage insurance payment depends on your credit and the cost of your home, but you can estimate the total to be between 0.3 percent and 1.5 percent, annually, of the original loan amount. Homeowner's insurance depends on how much you have to insure and how much coverage you need. And your property taxes just depend on where you live.
The parts of our monthly payment beyond principal and interest can (and likely will) go up over time. Maybe not as much as rent does, but still. Your housing costs as a homeowner are hardly a fixed expense.
Are Mortgage Calculators Accurate?
I mean, technically, yes. They're accurate. They're calculators. Even in an uncertain world, you can usually trust computers about numbers. But I think that online mortgage calculators can be seriously misleading in the early stages of buying a home.
As a renter, you have one big line item on your budget: rent. Your total housing expense is a round and uncomplicated number, possibly supplemented with a small amount for renter's insurance and utilities, depending on how you budget. When you become a homeowner, your "mortgage" (in quotes) is the sum of all of kinds of related payments you make to your lender (and maybe your HOA) each month. But the actual mortgage (no quotes) is technically just that principal and interest part, and if you just swap out your rent for the new number on the mortgage calculator in order to figure out if homeownership is possible for you, you're doing yourself a disservice by ignoring all the other expenses you'll be on the hook for.
In order to get a better picture of your future as a homeowner, you'll need to do a little more legwork. Research into property taxes in the area you're looking to buy (a real estate agent can help with this), get a quote from a homeowner's insurance company and, if you're putting less than 20 percent down, use a PMI calculator to estimate what mortgage insurance might cost you.