Here is the rundown on one of the most common mortgage terms: PITI
What does PITI stand for?
This is a very common question with a very easy answer. When talking about mortgages, PITI means "Principal, Interest, Taxes, Insurance."
You pronounce the acronym like “pity.” As in, it would be a pity if you didn’t know the meaning of PITI.
When it's all put together, the principal, interest, taxes, and insurance are the sum of a total mortgage payment. The means that the total mortgage loan payment amount includes the principal amount, the loan interest, the property tax, and the homeowner's property and private mortgage insurance premiums.
Let us break that down for you:
This is the original amount of money that you borrowed from your mortgage lender. Those in real estate usually consider it the most important part of your monthly mortgage payment because it’s the only amount reduces the unpaid balance of your mortgage.
Loan interest is the name for the extra money you pay the bank for lending you money in the first place. And, due to the way that lenders structure 30-year mortgages, it will also be the largest portion of your monthly payment.
This is the amount of local taxes you pay as a homeowner. Each county in the USA has its own tax system. Because of this, the amount of property tax you pay at closing depends on when your next tax statement is due and where you live. This is typically anywhere for two to six months worth of taxes.
Homeowner’s Property Insurance Premiums
This is amount of money you pay to protect your home and the belongings inside of it.
Private Mortgage Insurance Premiums
This is the money you pay to insure the loan you took out to cover your mortgage.
How do you calculate PITI?
It is luckily very easy to calculate PITI. All of you have to do is itemize the costs of each thing listed above and add them all together.
So, take your monthly mortgage payment (principal + interest), add in your property taxes, and your insurance premiums, and voila! You now know what to budget each month.
Why is PITI important?
As stated, PITI is the name for your total monthly mortgage payment. Because it is the total payment, it is a good idea to calculate it before you accept a loan. This way, you can make sure that you can afford it.
Lenders will also tend to calculate the PITI of a loan before approving a buyer, as they can take look at the buyer’s current financial situation and decide whether or not it is worth the risk to invest in them.
Are there exceptions to PITI?
Sometimes a monthly mortgage payment will not include taxes and insurance. In these cases, PITI will not apply. This is because some lenders do not require borrowers to place any of the funds for these things into escrow.
When this happens, the homeowner would instead pay the insurance premiums directly to the insurance company and property taxes directly to the local tax assessor. So in this case, the mortgage payment would only be made up of principal and interest.
Which, if you would like to stick to catchy acronyms, would be PI. Makes us a little hungry.