Why you need to ignore mortgage calculators

Raise your hand if you have ever used a “housing affordability” mortgage calculator to determine how much house you could afford. Wow, that’s a lot of hands. Did you know that all of those “housing calculators” are/were/and always will be wrong? Yeah, that’s not good. And if you acted on the “advice” that you learned from that calculator, then you may be living in a house that isn’t exactly affordable.

The major issue is that mortgage calculators often allow (recommend) that you allocate up to 33% of your gross monthly income to a mortgage payment. I don’t know about you, but I spend my net income, not my gross income. Pete the Planner recommends that you only allocate 25%. This is a HUGE difference. And don’t get your math twisted, it’s not just 8%.

Let’s take a look at an example. Let’s say that you have a household income of $70,000 per year.

That would mean that 33% of your gross monthly income would be $1,924

$70,000 / 12 = $5,833

$5,833 X 33% = $1,924

In contrast, 25% of your net income on $70,000 would be approximately $1,020.

$70,000 X 70% (30% for taxes and benefits) = $49,000

$49,000 / 12 = $4,083

$4,083 X 25% = $1,020.

That means that a mortgage calculator would tell you that you could afford $1,924, and your trusty Pete the Planner tells you that you can afford $1,020. That is a difference of $904 per month!!!

Therefore the difference between 33% of gross and 25% net is actually 15.5% of gross. HOLY CRAP!!!

13 thoughts on “Why you need to ignore mortgage calculators

  1. Great point, Pete. I used to spend my gross income, but then I stopped using credit cards as much, and now I only spend my net.

  2. Amazing advice. This is what we went through when we bought our home. Our mortgage sits right around the 25% mark of his pay, but our real estate agent was pushing for a much higher mortgage saying we could afford it.

  3. GREAT point Pete! As a realtor I totally understand and share the infoo with my clients. And shame on the one realtor of the writer (Annie) above for pushing somethin higher.. They should have been fired!… You know folks… You can do that… Including the mortgage people who do that too!!!

    Pamela Stephenson, Remax Legends

  4. I’m a HUGE supporter of Realtors and Mortgage Brokers. They provide a valuable professional service. Consumers DO need to understand that being an informed consumer is their own responsibility.

  5. In your example, is the monthly payment just principal and interest, or does that also include taxes and insurance?

  6. Also your upfront and monthly PMI need to be taken into consideration. The rate for Monthly PMI is based on several different factors and really needs to be figured by a Licensed Mortgage Professional. On a loan amount of $100,000 for example, you can count on AT LEAST an additional $100 per month.
    Myra Daubenspeck
    Keller Williams Indy Metro North
    GMFS Lending NMLS#235797

  7. I would also submit that buying a smaller house with a smaller mortgage saves on more than just monthly payments. Think of how much less furniture to buy, fewer walls to paint, lower utility bills…

  8. It actually makes me nauseous how much they recommend we spend on a house. I tried CNN money, and their “conservative” amount for us was over a half a million dollars! Bankrate was even worse, but there must be an bug in the system, because it said we could afford a home in the millions of dollars range. I am absolutely appalled. I thought these were reputable sites.

  9. My dad always told me to plan on at least 1% of the purchasing price of a home as its true monthly cost. So no matter what a “calculator” tells you that you can afford you count the whole shebangabang (piti,pmi, various homeownership headaches). If that number is too uncomfortable to bear monthly, you cant afford the house, no matter what a realtor says. In retrospect, I wish I had listened.

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