What Does PITI Stand For On A Mortgage?

What is PITI?

PITI stands for principal, interest, taxes and insurance, all of which make up your monthly mortgage payment. Principal (the amount you borrow from a lender) and interest (how much it costs to borrow that money) are the two big elements of your loan repayments. The principal and interest will be paid directly to the lender.

However, your payment also includes property taxes, which are charged by state, county and local governments to pay for the area’s schools, roads and other public services and infrastructure. The last piece of the PITI puzzle is homeowners insurance, which covers your home against certain natural disasters and other damage. The taxes and insurance premiums will go via the lender into an escrow account, which will most often be administered by an independent servicer.

P is for Principal

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 $400,000 home. You have 20 percent for a down payment, or $80,000. To pay the remaining amount, you secure a 30-year fixed-rate mortgage in the sum of $320,000. The loan principal, in this case, would be that $320,000.

I is for Interest

Borrowing money isn’t free. Besides principal, you’ll also pay interest on your mortgage — basically, a fee the lender charges to loan you money. It’s calculated as a percentage of your principal, otherwise known as the loan’s interest rate.

Following the example above, say your $320,000, 30-year fixed-rate mortgage has a 6.75 percent interest rate. At that rate, your monthly payment — covering the principal and the interest — would be around $2,076. You can use Bankrate’s amortization calculator to see how the application of your monthly payments will change over time.

T is for Taxes

The taxes included 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 or escrow agents often want a three-month reserve to cover property taxes.

I is for Insurance

Lenders require you to purchase homeowners insurance to obtain a mortgage. This insurance protects you and your home — your mortgage lender’s collateral — if it’s damaged due to a covered reason, such as a fire or severe weather event. Lenders generally require you to insure 80% of the home’s replacement cost.

Your homeowners insurance premium is typically included in your monthly mortgage payment. Like your property taxes, your lender will hold the premiums in escrow and pay your insurance company for you.

How to calculate your PITI payment

You can calculate your PITI payment by following these four steps:

1. Determine your principal and interest

Principal and interest costs will make up the largest portions of your mortgage payment. Let’s consider our earlier example: a $320,000 mortgage at 6.75 percent interest. It would result in a payment around $2,076 a month.

2. Research and add property taxes

The best way to account for property taxes is to research with your state or local government. Many states, counties and municipalities have property tax records and estimators you can use to understand how much property tax you’ll pay. For the most accurate estimate of your property taxes, contact your tax assessor and request a past record.

However, you can roughly estimate your monthly property taxes by dividing your property’s value by 1,000: Most taxes reflect a millage rate, which is $1 for every $1,000 of home value. So, for a $400,000 house, that’s $400 per month.

3. Estimate homeowners insurance cost

The average annual homeowners insurance premium for $300,000 in dwelling coverage is $2,242, or $187 a month. However, insurance costs can vary considerably depending on your home’s value, its location and the amount of coverage you purchase.

For an accurate estimate, get a few quotes for homeowners insurance from different companies. These quotes will not only help you understand how much you’ll pay, but they can also help you decide on a provider.

For the sake of our example, we’ll use $269 a month as our estimate, which is the average for $400,000 in dwelling coverage, according to Insurance.com.

4. Add totals together

Once you’ve estimated the elements of PITI, add them together to get your total monthly payment. For our example, this equates to:

$2,076 (principal and interest) + $400 (property taxes) + $269 (homeowners insurance) = $2,745 (total monthly PITI payment)

What is not included in PITI?

Not all costs associated with a mortgage are automatically factored into PITI. These include:

• Mortgage insurance premiums: These premiums apply to many conventional loans with a down payment under 20 percent and all FHA loans.
• HOA fees: You’ll pay these monthly charges if you buy a property in a neighborhood with a homeowners association.
• Closing costs: These costs aren’t included in the calculation unless you financed them with your loan as a no-closing-cost mortgage. In this case, they’d be included in the principal and interest portion of your payment. If you can, avoid rolling the closing costs into your mortgage as you’ll pay more interest over the life of your loan.
• Utilities: Ongoing utility costs (including gas, electricity, water and internet) aren’t included in PITI, meaning you’ll need to budget for them separately.
• Maintenance and repairs: This is another major expense for homeowners — and one that’s separate from PITI. Be prepared to pay for regular upkeep of your home and unexpected repairs or replacements.

Why is PITI important?

Aside from looking at your credit score, lenders account for PITI and your other debt obligations to calculate your housing expense and debt-to-income (DTI) ratios, which helps them determine whether you’ll be able to repay the loan based on your financial situation.

Your housing expense ratio, which lenders commonly refer to as a front-end ratio, is your PITI payment divided by your monthly income. The DTI ratio, or back-end ratio, is the total amount of debt you owe on a monthly basis, including the PITI payment, divided by your monthly income.

An acceptable front-end ratio for many lenders is 31 percent or less, while the ideal back-end ratio is 36 percent or less. That said, some accept a back-end ratio of up to 43 percent or even higher.

Mortgage affordability and PITI

PITI isn’t only useful for lenders, it’s also valuable for borrowers. Calculating PITI payments independently also gives you some insight into costs as you shop for a home. Taking this step can help you estimate if a potential mortgage’s monthly payments will be affordable or break your budget.

You can then use your calculation to steer your home search in the right direction, focusing on homes and locations that best align with your finances.

FAQs

• What is the maximum PITI?
  

  Maximum PITI represents the largest monthly mortgage payment you can afford based on your DTI ratio, monthly income and other debt obligations. As an example, let’s say your lender’s maximum DTI ratio is 36 percent. If your gross monthly income is $8,000 and you pay $250 per month in student loans, your maximum PITI would be $2,630.

• Can you lower PITI?
  

  You can lower your PITI in several ways. The mortgage principal and interest will make up the largest portion of your payment, so shop around with at least three mortgage lenders and build your credit to qualify for the lowest rate. You can — and should — comparison-shop for homeowners insurance as well. If you can make a bigger down payment, that’ll help lower your mortgage payment because you won’t need to borrow as much. And while you won’t have much say over your property taxes, some municipalities offer a discount if you pay in one lump sum.

• How does PITI change over time?
  

  With a fixed-rate mortgage, your monthly principal and interest payments will stay consistent dollar-wise over the life of the loan, since your interest rate remains the same. But with an adjustable-rate mortgage (ARM), the interest will change after the set introductory fixed-rate period (and at recurring periods thereafter), so you could end up with a higher monthly mortgage payment than what you started with. Finally, adjustments to your property taxes and homeowners insurance premiums, which tend to increase over time, will also impact your PITI.

Additional reporting by Ruben Caginalp