(Or, why H.A.L. is not the best choice to be your mortgage provider)
— Originally published in FLL#36[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]The peril of the online mortgage
calculator is not that it gives you “wrong” information; it is that it simply does not give you enough information [/pullquote]
It never fails that I have a minimum of one to two conversations per week in which my client has trouble grasping the amount of the monthly payment for the home that they have fallen in love with. It is not that they are reaching beyond their means, it is that they have fallen prey to the perils of online mortgage calculators. What is this peril you ask? Is an online calculator not accurate? Is there something more sinister going on? Well, not really sinister…let’s just call it opportunistic. The peril of the online mortgage calculator is not that it gives you “wrong” information; it is that it simply does not give you enough information. The concern is that the average consumer does not know… what they do not know. They don’t know the questions to ask (not that you can ask the computer anyway and even Siri is not yet ready for these questions—trust me, I’ve asked her just to see what she said. When queried, “Siri, what is PMI?” (Private Mortgage Insurance), she directed me to Wikipedia to explain that .pm is the Internet country code for Saint Pierre and Miquelon. Her second thought was that I was asking about premenstrual syndrome!
The fact that Siri did not even know what I was asking about (PMI or Private Mortgage Insurance is a monthly cost added to a mortgage payment on loans with less than 20% down payment), is indicative of the concern that arises with the online mortgage calculator. It is not that the information is wrong, it is just that it is not comprehensive enough.
The online calculators, for the most part, simply do the basic math of how much you are borrowing, based on the term of the loan and an interest rate that you enter, to show you a basic principle and interest payment. Good information, yes, but again, not enough. Do you want to include your taxes? That is not shown in the payment. Is your down payment less than 20%? If so, how much less? What is your mid credit score (for that matter, what IS a mid-credit score?) and can that be improved? All these things, and so many more, can affect the results of your monthly mortgage payments. The other big missing item is taxes and insurance. A simple principle and interest payment will exclude the monthly cost of real estate taxes and homeowner insurance. This is often a notable amount of your monthly payment and the cause of much consternation to your budget, if you are looking only at the base payment of a mortgage loan.
My purpose in this column is not to malign online tools, and in fact there are many that are better than others and more comprehensive, but again they make some assumptions (credit scores and taxes) and those assumptions can end up providing notable errors.
It boils down to this: Siri is great to help you find a cup of coffee or a slice of pizza for you when you are in an unfamiliar location, but when you are in the unfamiliar territory of mortgages, you need a guide. A living, breathing, experienced guide. When I prepare a payment quote for my clients, I typically know the answers to all of the questions that will impact their monthly payment and budget. I will provide a payment quote that is up to date with the most current rates, and will factor in all of the information specific to the client to make sure it is the most accurate payment possible to ensure that they can make an educated decision. As my wife always tells her students, “knowledge is power” and in the case of an online mortgage calculator, lack of knowledge can make for a powerfully bad decision.
Now, I think I’ll ask Siri about that cup of coffee.