Why your lender's quote doesn't match the calculator

You put your numbers into a mortgage calculator, get a monthly payment, and feel like you know where you stand. Then the lender comes back with a figure several hundred dollars higher. Nothing has gone wrong. The two numbers are answers to different questions.

A calculator gives you P&I. A lender quotes PITI

The headline number on almost every mortgage calculator is principal and interest — the cost of borrowing the money and paying it back. It is the part that is pure arithmetic, and it is the part a calculator can be exactly right about.

Your lender quotes PITI: principal, interest, taxes and insurance. The last two are collected monthly into an escrow account and paid out on your behalf once or twice a year. They are real money leaving your account every month, and on a modest house in a high-tax county they can add half again to the payment.

Property tax varies by county, and homeowner’s insurance varies by carrier, roof age and flood zone. No calculator can know either unless you tell it, which is why ours asks rather than guessing.

Then there is PMI, and it is conditional

Put down less than 20% on a conventional loan and you will usually pay private mortgage insurance until you have built enough equity. It typically runs somewhere between 0.3% and 1.5% of the loan each year, priced on your credit score and your down payment.

We estimate it at 0.6% where you have not given us a figure, which is a reasonable middle. It is an estimate and we say so on the page. Your lender will price it on your actual file.

The rate itself is not one number

This is the part that surprises people most. The rate you saw advertised is a rate that somebody can get — typically a borrower with a high credit score, a large down payment, a conforming loan amount and a single-family primary residence. Move away from that profile on any axis and the price moves.

• Credit score. The difference between a 780 and a 680 can be most of a percentage point.
• Loan-to-value. Less equity is more risk, and it is priced.
• Points. Advertised rates often assume you are buying the rate down with an upfront payment. That cost does not show up in the monthly figure at all.
• Occupancy and property type. Investment properties and condos price higher than an owner-occupied single-family home.

What to do with the gap

Use the calculator for the question it answers well: how the payment moves when the rate, the term or the amount changes. It is very good at showing you that a half-point costs you a specific number of dollars a month and a much larger number over thirty years.

Then get a Loan Estimate. It is a standardised three-page form every lender must give you within three business days of your application, and it lays out the rate, the monthly payment, the closing costs and the cash you need at the table. Because the format is fixed, two Loan Estimates can be compared line by line. Two advertised rates cannot.

The calculator tells you the shape of the decision. The Loan Estimate tells you the price.