PITI: What Does It Mean For Your Mortgage?

When it comes to buying a home, the most important financial instrument most people use to acquire their new house is a mortgage. On the surface, a mortgage seems like a pretty simple proposition. A mortgage lender gives you the money to buy your new house and you pay that loan back over time. Every month, for usually 15 – 30 years (or until you sell), you pay money toward the loan until it’s completely paid off and you own the house debt free.

Simple, right? Well, not so much, because the money you pay each month is actually broken down into different categories, often referred to with the acronym PITI. 

What Does PITI Mean?

PITI is an acronym for the four components of a mortgage payment: principal, interest, taxes and insurance. Every month, borrowers make payments on the principal balance and interest to pay off their home loan. When taxes and insurance are added, that constitutes your whole monthly payment.

During the home buying process, your mortgage lender can break down the principal, interest, taxes and insurance you will have to pay for each house you’re considering purchasing. As a borrower, it’s important to review these estimates carefully to ensure you’ll be able to afford your monthly mortgage payment.

Now let’s take a look at each of the 4 categories within PITI so you have a deeper understanding of where your money goes when you make that home mortgage payment each month.

Principal

When you take out a loan, you usually don't borrow the full cost of the home. In most cases, borrowers also provide a down payment, which is a lump sum of money you pay upfront when the home sale is officially processed. The amount of your down payment is a percentage of your home’s purchase price and reduces the amount that you’ll need to borrow from your mortgage lender.

For example, if you buy a home worth $300,000 with a 20% down payment ($60,000), your principal amount would be $240,000.

How much you need to put down for your down payment is largely a function of your debt-to-income ratio (DTI) and the type of loan you choose. Your DTI is a percentage that tells lenders how much money you spend on paying off debts versus how much money you have coming into your household. The better your DTI, the less lenders will require you to put down on the home. Or in other words, the more they will lend you. This also affects the interest rate on your loan.

Interest

Lenders don’t let you borrow money for free. Bummer, right? They charge a fee for lending you the cash to buy your home and that fee is called interest. Mortgage lenders calculate interest as a percentage of your principal over time.

For example, if your principal loan is $300,000 and your lender charges you an interest rate of 6%, this means that you pay $18,000 (6% of $300,000) for the first year of your mortgage in interest.

In the early years of your mortgage, you pay mostly interest instead of principal. This changes over time, however. Mortgage amortization is a scale that tells you how much of your monthly mortgage premium is applied to the principal of your loan and how much goes toward interest for each year over the course of your loan.

Taxes

Life, death and taxes. Some say those are the only certainties we face. Well, it’s certainly true that you can’t avoid paying property taxes when it comes to homeownership because it is built right into your monthly mortgage payment.

Your property taxes are used to pay for things like libraries, fire/police departments, public schools, road maintenance, park maintenance and community development projects.

As a rule, anticipate paying $1 for every $1,000 of your home’s value every month in property taxes. For example, if your home is worth $300,000, you pay around $300 per month in property taxes or about $3,600 per year. Keep in mind that this can vary greatly depending on where you live.

Insurance

Homeowners insurance represents the last part of PITI. When you find that dream home and buy it, homeowners insurance ensures that dream doesn't turn into a nightmare. If disaster strikes and you lose all or part of your home, insurance kicks in to help you repair or rebuild.

Homeowners insurance isn’t required by law, but most lenders will require you to purchase it before they agree to lend you money to buy a home. They need to protect their investment. Afterall, if you default on your loan, the home is the collateral they can take.

PITI In Real Estate

Understanding PITI during the home buying process is a critical part of making sound, well thought-out decisions. You need to know estimated PITI payments to understand how much house you can afford. Your lender needs to know this too so they can determine how much money they can lend you.

Most lenders use the 28% rule as a first look when they decide whether a loan is affordable, but that can vary depending on several factors, including the type of your loan. If you calculate a reasonable PITI for your area before you shop, you can save both time and stress if you only consider homes within your budget.

How PITI Impacts Your Mortgage

PITI matters when you are applying for a mortgage because lenders use PITI as a tool to determine how much of a monthly payment you can afford. To calculate how much home you can afford, be sure to also include things like utilities, maintenance and repairs, as well as condo or HOA fees. These are not included in your PITI.

How To Calculate Your PITI Payment

Most lenders will do this for you, but if you find yourself wanting to know if you can afford a home before you talk to your lender, here is how you can calculate your PITI on a 30-year fixed rate loan:

Let’s assume your monthly mortgage principal and interest will amount to about $1,432 per month. Add on your property tax and insurance estimations.

To calculate estimated property taxes, divide your home’s value by 1,000 and multiply that number by $1 to find your estimated monthly tax payment. In this example, $300,000/1,000 is $300, a single month’s worth of property taxes. To get the best possible estimate, check your state government’s website to see if they have a property tax estimator. This will give you the most realistic amount for property taxes that you’ll have to pay after you buy your new home.

To calculate an estimate of your monthly homeowners insurance payment, divide the value of your home by 1,000, multiply by $3.50 and divide by 12.

$300,000/1,000 = $300, $300 ✕ $3.50 = $1,050, and $1,050/12 = $87.50, a rough estimate of a month’s homeowner’s insurance.

Finally, add together all three numbers for your PITI estimation: $1,432.25 + $300 + $87.50 = $1,819.75, your PITI.

Divide your PITI by your total monthly income to find your ratio. If you earn $7,000 a month, your PITI would make up about 26% of your monthly budget, which means that the property should be an affordablechoice for your finances.

Too complicated? Fear not! You can use this handy dandy home affordability calculator.

The Bottom Line

Understanding PITI is a critical part of a successful home buying process. You need to know all the calculations that go into your monthly payment to have an accurate understanding of what it will be for each home you are interested in. That way, you can know if it is something you can afford. Afterall, you don’t want to get all excited about a new home and then have it end up being beyond your financial reach.

Ready to take the next step in your home buying journey? Start the approval process with Rocket Mortgage^® today!