PITI is an important acronym for any homeowner who has a mortgage. Your PITI payment is going to be what you pay every month for your home. It stands for Principal, Interest, Taxes, and Insurance.
Why Your PITI Payment Matters
Prospective buyers sometimes incorrectly assume they are able to afford a house because they are only looking at the portion of the potential payment, which is their principal loan payment.
Buyers should beware of ads that promise homeownership for less than you pay in rent because these ads typically only refer to the interest and principal of the loan.
People get lured into this low monthly payment and then don’t realize it doesn’t include taxes or insurance. When it’s all put together, the final payment they are looking at can be double. In order to avoid the sticker shock, looking at the full PITI payment is necessary when shopping around for homes and different financing options.
The loan principal is the amount of money you originally borrow for the home. With most types of mortgages, this amount will decrease every time you make a payment. You aren’t typically able to lower your principal, but you can pay it down quicker instead of the schedule dictated by the lender.
During the initial years of you paying off the mortgage, very little goes toward the principal each month but as the loan gets older, more of your payment goes toward this.
The amortization schedule of your loan breaks down how much of each payment ends up going toward the principal.
A loan provider has a number of options to make money when lending homeowners money to buy a home. This includes closing costs, points, and interest you pay over time. Just like with the principal, you pay interest over time.
During the early years of your mortgage, you are paying more in interest and this decreases as more of the principal is paid down. The amount of interest you are paying on the loan can be lowered if you pay off your mortgage ahead of schedule.
A portion of your payment goes to property or real estate taxes paid to your local government. What you end up paying for taxes depends on different factors, including your city’s tax rate and your property. Real estate taxes are based on the assessed value of the home, which means they can be higher or lower than what your property was valued at during the purchase. The tax portion of your payment is held in an escrow account and is then sent to your city or town by the lender when the taxes are due.
This portion of your payment covers homeowners insurance and private mortgage insurance if you have it. Your homeowners insurance protects the property in the event of damage and, depending on where you live, you may need to take out extra insurance, such as flood insurance.
Your lender requires that you have homeowners insurance. When you put less than 20% down at the time of purchase, you have to have private mortgage insurance, which protects the lender in case you default. Just like with taxes, the portion of this payment is held in an escrow account until it’s time to pay.