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.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
My mortgage expense is about 60-70%. HOA and property tax are the two big bills for me. The other expenses are pretty small. Yeah, owning a home is expensive.
When I first thought I could afford a mortgage I made the mistake of only looking at a calculator like that. It didn’t occur to me all of the other expenses that would add up. It makes me glad that I decided to put it off a bit until I could afford it a little more comfortably.
Our mortgage is a baby, so we’re paying a lot more in interest right now. We did get the 20-year instead of the 30-year, though. We definitely underestimated the cost of owning a home. We were actually told we could afford a house $50,000 more than the one we bought, too! We were approved for an amount way above what we could actually afford. Sure, we could afford it if we didn’t want to buy a car ever and never ate….oh, and if nothing in our house ever broke. Genius. I don’t know how they come up with the amount you’re approved for, but it’s a good thing we didn’t buy a house for that much or we’d be bankrupt.
For me, it’s actually just under 50% (not counting extra principal payments, just what my mortgage payment would be every month if I paid normally). But when we bought the house (which was way less than we could afford), we knew it would need a roof in 2-3 years, so I’ve been saving every month for that (which we’re getting replaced in the next month or two). Once we do that, I’ll cut back on what I’m saving for “home maintenance and repair,” so that percentage will probably go up to 60-65%. That’s still somewhat low, but our house was built in the 50’s, and we’re still planning on some more upgrades. If I only wanted to maintain the home in its current state, I could easily cut back on other expenditure so that the mortgage was over 70% of total homeownership costs.
My mortgage payment is $700 bi-weekly, meaning I paid $18,200 in mortgage payments last year. My taxes are approximately $1500 per year, and my repairs were less than $200. (I had a clogged main sewer line, but a plumber took care of that easily.) I paid $800 for home insurance. So, my mortgage expense is approximately 80-85%.
Kevin, it’s called a mortgage calculator. It’s not called a ‘price of home ownership’ calculator. I agree, there are hidden costs of owning a home. There’s also the historical fact that, over somebody’s lifetime, the appreciation of their home will more than make up for those costs.
And this is why I pretty much ignored mortgage calculators in doing my calculations. I found an Excel formula that calculated how much my monthly mortgage payment would be and then added in HOA dues, property taxes / 12, etc. I also made spreadsheets showing how much the condo would cost me over the next 7 years (since that’s how long I planned on staying) with each of the different interest rate/closing costs options.
I did some math and found that PMI shot up the monthly payment so much that it wasn’t really worth it to me to buy a place with a down payment smaller than 20%. I also don’t want my total housing expenses to be more than 25% of my gross income.
Kevin- I don’t know what it’s like in your part of DFW- but a couple counties north of you- where I live our property taxes & insurance almost double our monthly payment.
Personally, I love all the billboards up here I see from Home Builders that promote the $750 house payments.
For me, it is close to 40%. I agree though about mortgage calculators being misleading. The example that you give above about not telling you how much it will cost overall is the reason why car salesmen ask you what you want to pay per month. They can extend the loan to however long they need to in order to get you into the car at your ideal monthly price. What they don’t tell you is that by extending the term so long, you’re going to pay for a car and a half when interest is factored in!!
I usually tend to steer people to this website and this calculator:
http://michaelbluejay.com/house/rentvsbuy.html
when people ask me why I am waiting on buying or when they are yelling at me that I am throwing my money away by renting.
home ownership? it is nothing but a rip off of the public. it they tell you it;s 1000.00 a month get ready to pay 1750.00. it is a lie in every sense of the word.
Kevin, just buy a home already. It’s a priceless feeling!