What Does PITI Stand For On A Mortgage?

If you’re buying a home, you’ll likely see the terms “principal” and “interest” when talking about a mortgage. These are general terms that describe the amount you’re borrowing and how much it will cost you — the two biggest components of loan repayment.

But there are other expenses included in your monthly mortgage payment — the two most common are property taxes and homeowners insurance — and together, these four expenses are referred to as “PITI.”

What does PITI mean?

PITI stands for principal, interest, taxes and insurance, which all make up your monthly mortgage payment. Let’s take a closer look at the components of PITI.

P stands for principal

The principal of a mortgage is the amount you borrow from a lender to buy a home. For example, let’s say you want to buy a home that costs $400,000. You put down 20 percent, or $80,000, as a down payment. To pay the remaining balance, you take out a 30-year fixed-rate mortgage for $320,000. In this case, the principal of your loan is that $320,000.

I is for Interest

Borrowing money isn’t free. Besides the principal, you’ll also pay mortgage interest. This is basically the fee that lenders charge for lending you money. It’s calculated as a percentage of the principal and is also known as the interest rate on the loan.

Following our example above, let’s say your $320,000 30-year fixed-rate mortgage has an interest rate of 7.5 percent. At that rate, your monthly payment for principal and interest would be approximately $2,237.

A mortgage is an installment loan, which means that you pay it back in installments over time. The amount you pay doesn’t change, but how you pay it back does. At first, a larger amount of your monthly mortgage payment goes toward interest, but as you pay it off, more goes toward the principal. (Mortgages tend to be structured this way because they’re less risky for lenders.) So in the first month of the mortgage above, about $2,000 of your payment would go toward interest, and about $237 would go toward the loan principal.

Bankrate’s amortization calculator can help you see how your monthly payments change over time — how much goes toward principal and how much goes toward interest at various points in your repayment term, and what the impact is on your overall mortgage balance.

T is tax

The taxes included in your monthly mortgage payment are property taxes, which are determined by the assessed value of your home or other homes in your tax jurisdiction. Typically, your lender collects these taxes through your mortgage payments, holds them in an escrow account, and pays them on your behalf when they are due.

I am insurance

Lenders will require you to buy homeowners insurance in order to get a mortgage. This insurance protects you and the home (the mortgage lender’s collateral) if the home is damaged due to a covered reason, such as fire or severe weather.

Home insurance premiums are usually included in your monthly mortgage payment. Like property taxes, your lender holds the premiums in escrow and pays them on your behalf to the insurance company.

How PITI payments are calculated

You can calculate your PITI payments by following these four steps:

1. Determine the principal and interest

The largest part of a mortgage payment is made up of principal and interest. Let’s continue with our example of a $320,000 mortgage at a 7.5 percent interest rate. In this case, your monthly payment would be about $2,237.

2. Research and add property taxes

The best way to calculate your property taxes is to request a tax assessment from your state or local government. Many states, counties, and municipalities have property tax records and estimates that you can use to figure out how much you owe in property taxes. To get the most accurate estimate of your property taxes, contact your tax assessor and request past records.

However, you can roughly estimate your monthly property taxes by dividing the value of your property by 1000. Most taxes reflect a tax rate, which is $1 for every $1000 of your home’s value, so for a $400,000 home, that would be $400 per month.

3. Estimate your homeowners insurance premiums

If your home has a $300,000 home insurance amount, the average annual premium is $2,270, or $189 per month, but premiums can vary significantly depending on the value of your home, its location, and the amount of coverage you purchase.

To get an accurate estimate, get several homeowners insurance quotes from different companies. These quotes will not only help you understand how much you will be paying, but they will also help you decide on an insurance company.

For this example, we’ll use $269 per month as our estimate, which is the average for $400,000 in home coverage according to Insurance.com.

4. Add up the totals

Once you have estimated your PITI components, add them together to get your total monthly payment. In this example, it would look like this:

$2,237 (principal and interest) + $400 (Property Tax) + $269 (Homeowners Insurance) = $2,906 (total monthly PITI payments)

What is not included in PITI?

Not all mortgage-related costs are automatically rolled into PITI, including:

• Mortgage Insurance PremiumsThese premiums apply to many conventional loans with less than 20% down payment and all FHA loans.
• HOA Fees: If you buy property in an area with a homeowners association, you’ll pay these fees monthly.
• Closing costs: These costs are not included in the calculation unless you have financed your loan as a mortgage with no closing costs, in which case these costs are included in the principal and interest portion of your payment.

Why is PITI important?

In addition to looking at your credit score, lenders will also take into account your PITI and other debts to calculate your housing costs and debt-to-income ratio (DTI), which helps lenders determine whether you can repay the loan based on your financial situation.

The housing expense ratio, what lenders commonly call the front-end ratio, is your PITI payment divided by your monthly income, while the DTI ratio, or back-end ratio, is your total monthly debts, including your PITI payment, divided by your monthly income.

For many lenders, an acceptable front-end ratio is 31 percent or less, while an ideal back-end ratio is 36 percent or less, although some lenders will accept back-end ratios up to 43 percent or even more.

Mortgage Repayment Ability and PITI

Not only is PITI helpful to lenders, it can also be valuable to borrowers. Calculating your PITI payment separately can also give you some idea of ​​how much it will cost you to buy a home. Taking this step can help you estimate whether a potential mortgage monthly payment is affordable or out of your budget.

You can then use the calculations to hone in on the homes and locations that best suit your financial situation and get your house search moving in the right direction.

Frequently Asked Questions about PITI

Additional reporting by Jess Ulrich