How to Maximize Your Home Mortgage Calculator's Usefulness
When you're budgeting for your first home it's not quite as simple as plugging a few numbers into a home loan calculator and discovering how much of a loan you can afford to take. While these calculators can be excellent for giving you an estimate, it's also true that there are other costs beyond simply your mortgage and interest. Let's review what costs you should be thinking about.
Most lenders will require you to purchase a homeowners insurance policy before you get your mortgage. The costs of a homeowners insurance policy will vary greatly based on where you live. The federal average in 2010 was $481 a year according to the Insurance Information Institute; however, many factors will affect your premiums including:
- Your location.
- The price of your home.
- Flooding – those who live on flood plains will pay substantially more than those who don't.
- The type of home you buy. Some homeowners insurance companies will require higher premiums on older homes versus newer homes because the repairs to older homes tend to be more costly.
- Hurricanes – if you live in a hurricane zone then you can expect to pay more than those who don't.
- Earthquakes – once again, living in an earthquake zone will almost always raise your premiums.
The good news is that you'll be able to shop around and find the best rate on homeowners insurance. In many areas it's very affordable but in others it can be quite costly. Get a few quotes before you decide on whether or not to buy a home so you can take into account your monthly rates.
In some cases, property taxes will be paid by your mortgage lender. This doesn't mean they're free, it simply means that the cost is rolled into your mortgage and you don't have to worry about. However, it will mean that your monthly premiums will be higher than a home loan calculator will tell you based on just the price of the mortgage.
Also keep in mind that property taxes can go up – in some cases substantially. It all depends on where you live. For example, in California, it's almost impossible for the state to raise property taxes so you can feel reasonably certain that your property taxes will remain virtually the same for some time. On the other hand, other areas have seen significant property tax increases. You'll need to account for the possible change when you consider how much of a mortgage to take out.
Private Mortgage Insurance
Private Mortgage Insurance, or PMI, is additional insurance that some private mortgage lenders will require. It protects them in the event that a buyer defaults on their loan before they've paid down the loan. It is not always required but typically is if a buyer puts down a down payment of less than 20%. Also keep in mind that once you've paid down the loan 20%, you will be able to cancel your PMI. The monthly premiums for PMI range depending on numerous factors (including the price of the home) but average around $50 - $80 per month on a $159,000 home.
Buying a house is a huge investment that can result in owning the home of your dreams or it can be a financial headache. Using a home loan calculator is a great first step in determining how much of a mortgage you can afford but these extra costs should also be taken into consideration.