What Is PITI When Paying Down a Mortgage?
As a homebuyer looking for a loan, you’ll likely come across mortgage jargon throughout the lending process that may need explaining. That includes something called PITI. It’s important to understand what PITI stands for — principal, interest, taxes and insurance — and how it affects your monthly mortgage payments.
What is PITI?
PITI represents the components of a monthly mortgage payment, which is made of how much principal you owe on the loan, as well as interest, taxes and insurance. Below is a breakdown of each expense.
The principal portion of a mortgage payment is the lump sum amount you borrow from your lender to buy your home. If your home price is $200,000 and you make a 20% down payment that’s equal to $40,000, your principal amount is $160,000.
A portion of your mortgage payment goes toward paying down your principal balance each month. During the first several years of your repayment term, very little of it typically goes toward reducing principal. But as your loan ages — and your balance drops — a larger portion of your monthly payment goes to paying off principal.
Your mortgage’s amortization schedule illustrates exactly how much of each payment will go toward paying off principal. You can shrink it faster by making additional payments on your mortgage — and asking your lender to apply those payments to the principal amount.
The interest in a PITI payment is the fee you pay for borrowing from your lender. It’s why your mortgage interest rate is so important when shopping around for a lender. The higher your interest rate, the more you’ll pay for your mortgage over time.
A majority of each payment goes toward paying off interest during the early years of a mortgage, and that amount will decrease as the loan progresses. To reduce the interest you owe, you may want to consider paying down your mortgage faster.
Property taxes are often paid on an annual basis, but are divided into 12 monthly installments and added to your monthly mortgage payment. Your mortgage lender will typically save this portion of your payment in an escrow account and withdraw the funds to pay your local government on your behalf when your taxes come due.
What you owe on property taxes will depend on multiple factors, including your city’s or county’s tax rate and the property itself.
The insurance portion of your PITI payment refers to homeowners insurance and mortgage insurance, if applicable.
Homeowners insurance protects your home and property in the event of damage or theft. Depending on the property and location, you may need to purchase additional protection such as earthquake or flood coverage.
If you’re putting down less than 20% on a conventional loan, you’re required to pay for private mortgage insurance (PMI), which protects the lender if you default on your mortgage payments. Once you build at least 20% equity in your home — and your loan-to-value (LTV) ratio is 80% or less — you can get rid of PMI.
If you’re borrowing a loan insured by the Federal Housing Administration (FHA), you’ll also have mortgage insurance premiums to pay. FHA mortgage insurance is usually paid for the life of the loan, unless you put down at least 10% of the home’s purchase price. If that’s the case, you can expect to cancel the insurance after 11 years.
As with property taxes, your annual home and mortgage insurance costs are typically also divided by 12, added to your monthly payments and held in escrow. Your lender pays them when they’re due.
How to calculate your PITI payment
A straightforward way to calculate your PITI payment is by using an online tool, like LendingTree’s home loan calculator. It includes inputs for all of the elements of PITI.
To get as close to an accurate payment as possible with our calculator, you’ll need to know either your actual or estimated:
- Home price
- Down payment amount
- Mortgage rate
- Property taxes
- Homeowners insurance premium
By using a calculator to crunch the numbers for your PITI payment, you can decide whether a home you’re interested in buying is truly affordable.
Why PITI matters to the homebuying process
It’s easy to assume you can afford a home if you’re focused solely on a mortgage’s principal and interest costs — and not accounting for expenses like annual property taxes and insurance.
Focusing on PITI will give you an accurate picture of the true cost of homeownership. For example, if you were to take a 30-year mortgage on a $200,000 home, with a 1.25% property tax rate ($2,500) and a $700 annual homeowners insurance premium, you’d see a significant cost difference in your monthly payment, as you’ll see in the chart below. It shows your PITI payment would be almost $267 higher than just paying off principal and interest.
|Principal and Interest||PITI|
|20% down payment||$40,000||$40,000|
Here’s another reason why PITI is important: Your lender will use your estimated PITI mortgage payment to calculate your debt-to-income (DTI) ratio, or the percentage of your gross monthly income used to repay debt. This calculation also includes auto loans, credit cards, student loans and other recurring debt payments. In most cases, if your DTI ratio exceeds 43% it can be harder to get approved for a mortgage.
3 other items to budget for when buying a home
PITI is just one important concept to understand when buying a home. If you’re trying to figure out how much house you can afford, you’ll also need to consider the following three costs that are typically associated with homeownership:
Utilities. Most likely, you’ll need to pay for electricity, gas, water, sewer, trash and cable and internet bills. If you’re unsure of what to project for potential utility payments, ask the seller and future neighbors about their average costs.
Maintenance and repairs. A good rule of thumb is to stash away 1% to 5% of your home’s price each year, and earmark that money for maintenance costs and repairs. How much you should save depends on the age of your home. For a home costing $200,000, that would mean putting aside between $2,000 and $10,000 annually.
Condo or HOA fees. Condo or homeowners association fees typically aren’t included in mortgage payments, but lenders will consider them while qualifying you for a loan. If you plan to live in a community with an owners association, you may need to budget for these fees.