Discrepancy between different mortgage calculators?
Of course when someone first starts thinking about buying a house, the first thing they ask is “how much can I afford?” Very reasonable question. Good thing to know before you go out shopping.
The problem is that different banks/lenders calculate it slightly different. They all usually look at two things: your payment-to-income ratio (only up to a certain percent of your income should go towards a house) and your debt-to-income ratio (only up to a certain percent of your income should be used for house + other recurring debt).
The most common values are 28% for the payment-to-income ratio and 36% for your debt-to-income ratio. These vary from place to place, but often not too far off.
So, as an example, lets take someone who makes $5,000 a month ($60,000 per year) and has $500/month in recurring debt (car payments + credit card minimum payment requirements). Based on those values, they would have a maximum payment-to-income value of $1,400 per month. For the debt-to-income, the maximum value would be $1,800. Subtract the recurring monthly debt of $500, and you are left with $1,300. The maximum monthly payment then becomes the lesser of the two, so it goes with $1,300.
The place where I have found a discrepancy with many home affordability calculators is in taking it from this point to the house’s purchase price.
The two calculators I’ve come across include one at Realtor.com and one at Bankrate.com. Use these terms:
Income: $5,000 month (or $60,000 per year)
Debt payments: $500
Loan term: 30 years
Loan rate: 6.5%
Now calculate. You’ll see Realtor.com says “$1300 monthly payment” and Bankrate.com says “Affordable mortgage payment: $1300″. So we’re in agreement! But wait, not so quick. What is this? Realtor.com has a maximum house price of $175,349 while Bankrate.com says $230,674. That is a difference of more than $55k!
Realtor.com is actually kind of deceiving. You may look at that “$1,300 monthly payment” and assume that means monthly mortgage payment, but it is not. Realtor.com calculates the “total monthly payment” as mortgage payment (principle+interest), monthly property taxes, PMI, and hazard insurance all added up. While Bankrate treats the number as just the monthly mortgage payment.
So which is it? Do banks and lends use the 28/36 calculation to figure out the total monthly payment, or just the monthly mortgage payment? As you can see from the simple example above, that minor detail can have you looking in a completely different category of homes (especially in California!).
According to my trusty Mortgages for Dummies (which actually is a good book), this number actually is the mortgage payment along with the property tax, PMI, and insurance. So while Bankrate’s calculator makes it look better and you’d naturally want to trust it more (because you want to be able to afford more), it would be nice if there was some consistency between them. They are both major sites and both something that a new home buyer could run into when Googling for mortgage calculators.
