To best understand the validity of a cost estimator tool, it is important to grasp exactly what it is, what it does, and how it can be beneficial. When it comes to what you can reasonably afford in a house, cost estimator tools are readily available for you to plug in the specifics of your financial numbers and have data generated to give you a snapshot of cost.
Keep in mind, websites and apps that are offering these cost estimators are doing so not only to help you but also, often collecting data in order to connect you with personalized help or to follow up with specific marketing tools and products related to real estate agents, brokerages, banks, and mortgage lenders.
How Much House Can I Afford?
When looking into how much house you can afford, most cost estimator tools will lead you to supply a series of answers to the following questions: are you planning to purchase or refinance a home; do you have any connection to military service and if so, how and to what extent; what is the range of price you are looking to spend; what type of home (single-family, condo, or new construction) are you planning to buy; how do you plan to use the home (primary or secondary residence vs. investment property); what is your timeline is for purchasing; what is your current status is as a homeowner or renter; is this your first time buying a home; what is a general idea of your current credit score; what is your marital status; what is an estimate is of your annual income; and where will the home be located that you are intending to buy?
Additionally be prepared to provide your email address in order to get access to the final, bottom line number that this collected information will generate. You will get a numerical dollar amount based on ranges of what you may qualify for based on the type of house, the area you’re looking for, and income. Many people qualify for a higher amount of debt than may be advisable to actually purchase a home. When it comes to what you can afford, most experts agree that keeping your home expenses (mortgage, insurance, taxes) at or under 25% of your monthly take-home pay is ideal.
Are These Numbers Really That Accurate?
While these calculators and estimators will allow users to see monthly mortgage costs based on loan terms, interest rates, and down payment amounts, the numbers that are aggregated by online tools such as these should be used only as ballpark estimates.
Often these tools can leave out important calculations and may not be indicative of exact costs associated with buying a home. Exact numbers that include line items like the costs to buy down interest rate percentage points, closing costs, lender or origination fees, legal fees, HOA dues, and even the total amount of interest paid over the life of the loan are often omitted from mortgage calculation costs using estimator tools.
The Consumer Financial Protection Bureau at ConsumerFinance.gov warns, “Don’t let your monthly mortgage payment be a mystery. Mortgage calculators are helpful tools to get an estimate as you shop, but make sure you’re considering all the additional costs of buying a home before you make a decision.”
The bottom line: calculators and estimators are a tool that can help give you a general idea of the monthly costs of homeownership. However, they should not be relied upon for exact totals for monthly expenses related to purchasing or owning a home.