If you’re buying a home for the first time, you’ll likely come across the terms “principal” and “interest” when referring to a mortgage. These are common terms that describe what you’re borrowing and how much it’ll cost you, but there are other costs in addition to these that make up your whole mortgage payment. Together, these costs are known as “PITI.”
What does PITI mean?
PITI stands for principal, interest, taxes and insurance, all of which make up your monthly mortgage payment. PITI doesn’t include the closing costs for your mortgage, which are due when you close your loan and can range from 2 percent to 5 percent of the amount you borrowed.
The principal on your mortgage is the amount you borrow from a lender to finance a home purchase. Let’s say you’re buying a $200,000 home and you have 20 percent for a down payment, or $40,000. In order to finance the remaining $160,000 of the home’s price, you secure a 30-year fixed-rate mortgage. The principal, in this case, would be $160,000.
Mortgages come with interest, which is the amount the lender charges you to loan you money. This added cost is determined by your interest rate.
Following the example above, say you put 20 percent down on a home costing $200,000, and you get a 30-year fixed-rate mortgage to finance the remaining $160,000 at 2.9 percent interest. At that rate, your monthly payment would come to $665 (excluding homeowners insurance and property taxes). If your rate were 3.2 percent, you’d pay slightly more, $691, per month.
At first, more of your monthly mortgage payment covers the cost of the interest, but as you continue to repay the loan, more of that payment tackles the principal. Mortgages tend to be structured this way because it’s less risky for the lender.
A mortgage is an amortizing loan, meaning you’ll repay the loan in installments over a period of time. You can use Bankrate’s amortization calculator to see how your monthly payments change over your loan term, and how much goes to principal and how much goes to interest at different points in your repayment period.
The taxes you pay for in your monthly mortgage payment are property taxes, which are determined by the assessed value of your home or other homes in your tax jurisdiction. Typically, your lender collects these taxes for you through your mortgage payment, holds them in an escrow account and pays them on your behalf when they come due.
Lenders require you to purchase homeowners insurance in order for you to obtain a mortgage. Insurance provides coverage for you in the event your home is damaged, and also serves to protect the asset — your home — that your lender is using as collateral to secure your loan.
Your insurance premium is typically included in your monthly mortgage payment. Like your property taxes, your lender will hold the premiums in escrow and pay them to your insurance company for you. The average annual homeowners insurance premium in the U.S. stands at $1,477.
Homeowners insurance might not be the only premium included in your monthly mortgage payment, however. Depending on the type of mortgage you’re getting and the amount of your down payment, you might also need to pay for mortgage insurance, which protects the lender if you default on your loan. This extra cost will increase your monthly payment.
Aside from PITI, you might also pay for homeowners association fees in your monthly mortgage payment. If the home you’re buying is in a homeowners association, you’ll have to pay these dues to help fund everything that keeps the community maintained.
How to calculate PITI
You can use Bankrate’s PITI calculator to estimate your monthly mortgage payment with taxes and insurance. To do this, enter your information into the following fields:
- Mortgage amount
- Term in years
- Interest rate
- Annual property taxes
- Annual home insurance
For example, if you were to take out a 30-year fixed-rate mortgage for $240,000 at 3.2 percent interest, and pay $1,477 annually for homeowners insurance and $2,375 in annual property tax, your PITI would be $1,618.40. The principal and interest payments alone would be $1,297.40.
If you want to calculate PITI in a simple way or without the help of an online calculator, you can divide your annual property taxes and homeowners insurance premiums by 12, and add that to the combined principal and interest payment on your amortization schedule.
How mortgage lenders use PITI
Aside from looking at your credit score, lenders take into account PITI and your other debt obligations to calculate your debt-to-income (DTI) ratio, which helps them determine whether you’ll be able to repay the loan based on your financial situation. The DTI ratio is the amount of debt you owe on a monthly basis, including the PITI payment, divided by your monthly income.
The ideal DTI ratio for lenders is 36 percent or less, but many accept up to 43 percent or even higher.
Before getting a mortgage, it’s important to make sure you can afford not only the monthly principal and interest payments on the loan, but also the property taxes and homeowners insurance, mortgage insurance or HOA fees. Together, these make up your PITI payment, and represent a more accurate view of what your total costs will be.