A mortgage payment contains for essential components: PITI, which stands for principal, interest, taxes and insurance. When you obtain a mortgage, you will pay back the principal over years, which includes interest charges. Your payment may also contain property taxes and insurance paid to the lender.
PITI encompasses your entire monthly mortgage payment if you put down less than 20%.
The amount of the loan the lender extends to you is the principal. The monthly mortgage payment you make will include some amount of principal. As long as you continue making payments, the principal will slowly drop. This is the goal if you want to own the home outright.
With most mortgage products, the principal component of the PITI (or monthly payments) is very small. This is especially true with long-term mortgages, such as a 30-year mortgage. For the first few years, you will pay very little toward principal. Toward the end of your loan, most of your payment will go toward principal, rather than interest.
The interest component of PITI is the rate the lender charges for the loan. This is one of the most complex aspects of PITI because it is determined by many factors, including:
- Your credit score and history
- Market conditions
- Your down payment
- The state, city and locality
- The type of property
- The type of mortgage you choose
If you have a fixed-rate mortgage, the interest rate will remain the same throughout the life of the loan, as long as you do not refinance. If you have an adjustable-rate mortgage, the interest on your loan will adjust periodically to market conditions.
During the beginning of your loan, interest is the main component of PITI.
The city and state government levies a tax on nearly everything you purchase, including your home. The tax component of PITI is the local property tax on your home. This can be very difficult to calculate on your own and pay alongside other taxes you are obligated to pay. For this reason, lenders usually collect the taxes from you and deliver them to local authorities.
Taxes differ at the state, city and municipality level. If you buy a home in a high-end market, taxes may result in a higher PITI. Depending on where you buy a home, the tax component of your payment may be very insignificant or substantial.
Along with the insurance component of your payment, taxes are usually held in an escrow account used to pay these obligations on your behalf.
Your lender has an interest in your property and thus wants to ensure it is protected against losses. This means you will need to pay homeowner's insurance. In some high-risk areas, your lender may also want you to insure the home with supplemental insurance as well, such as flood insurance or earthquake insurance.
If you purchase a home with less than 20% down, you may also be required to pay for private mortgage insurance (PMI).
How PITI Is Calculated
A PITI calculator can help you break down your payment into each component. You may also want to talk with your mortgage broker and ask for an explanation of each component of the PITI by year and stage of the loan.