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There are all kinds of tools and worksheets to help us manage our finances or determine what we will pay on a monthly loan. While these are great resources for delivering estimates and general guidelines, their answers should not be taken as completely valid.
HWhy is that? Let’s use a home improvement loan calculator as an example. The potential borrower searches the Internet to find one of these calculators and sees that they are required to input three amounts of information: amount borrowed, length of loan and interest rate. The magic of the Internet immediately allows a monthly payment to be determined and appear on the user’s screen.
Is this home improvement loan calculator correct? The answer to that question is both yes and no. It is, of course correct in its mathematical calculations, but did it provide the accurate monthly payment to be made by the borrower? No, not really. This is because a home improvement loan calculator cannot figure fees, closing costs and additional items that appear on every mortgage document.
Wait, this is a home improvement loan calculator, not a mortgage calculator, right? Again, the answer is both yes and no. While most banks label some of their products as home improvement loans or equity loans and lines of credit, in reality they are all ultimately mortgages against the property. They create the same liabilities as do first mortgages, and may come with some of the same tax breaks as well.
So, if I use a home improvement loan calculator it is the same as figuring out a second mortgage payment on my home? Basically the answer is yes, though some home improvement loans have terms a bit different than a traditional second mortgage. For example, some home improvement loans are actually distributed to contractors, builders and suppliers through the lending agent, or in payments made in stages to the borrower. Clearly this is dramatically different from a traditional mortgage arrangement.
In order to determine a payment accurately, the borrower would need to locate a home improvement loan calculator with far more than three line items. It is quite acceptable to ask lenders for their worksheets and try to figure this out on your own. Many spreadsheet programs also have built in loan calculators as well, which allow for many variables and sums to be added to the formula.
It isn’t a bad idea to base a search for a home improvement loan based on the monthly payment generated by a home improvement loan calculator because it does provide a fair estimate of what each payment will be.