PITI Explained

Understanding Your Mortgage Payment

When you take out a mortgage to buy a home, your monthly payment often consists of four main parts, collectively known as PITI. Understanding PITI is crucial because it represents your total monthly housing expense and is the figure lenders use to determine your mortgage affordability.

PITI stands for Principal, Interest, Taxes, and Insurance. While the principal and interest are tied directly to your loan, taxes and insurance are associated with owning the property itself and are usually collected into an escrow account.

Principal (P)

The principal is the portion of your monthly payment that goes toward paying down the original amount you borrowed.

In the early years of a typical mortgage, a larger portion of your payment goes towards interest rather than principal. As you gradually pay off the loan, the interest balance shrinks, and a higher percentage of the payment begins to pay down the principal. This process is called amortization.

Interest (I)

Interest is the cost of borrowing the money from your lender. It is calculated as a percentage of your outstanding loan balance.

Your interest rate depends on several factors, including broader economic conditions, your credit score, down payment size, and the type of loan you choose (e.g., fixed-rate vs. adjustable-rate). Lower interest rates can drastically reduce your monthly payment and the total cost of the loan over time.

Taxes (T)

When you own real estate, you must pay property taxes to your local government (county and/or municipality) to fund public services like schools, roads, and emergency services.

Taxes are usually calculated as a percentage of your home's assessed value. Because property taxes are due annually or semi-annually, lenders typically collect 1/12th of your estimated annual tax bill with each monthly mortgage payment and store it in an escrow account to pay the tax bill on your behalf when it's due.

Insurance (I)

The final chunk of your PITI payment goes toward insurance, which can include two types: Homeowners Insurance and Mortgage Insurance.

• Homeowners Insurance: Protects your property against hazards like fire, theft, and natural disasters. Lenders require this to protect their investment. Like taxes, premiums are often escrowed.
• Private Mortgage Insurance (PMI): If you put down less than 20% on a conventional loan, your lender will typically require PMI. This insurance protects the lender (not you) in case you default. Government loans like FHA or VA loans have their own versions of mortgage insurance premiums.