It’s A Pity If You Don’t Understand PITI

What is PITI?

If you are new to mortgages this is a term you might not be familiar with. However, understanding PITI is important to truly understanding if you, as a home buyer, can afford a particular home. We understand it can be easy to ignore learning about terms you don’t understand. Buying a home can be scary. The words your mortgage broker may use even scarier. We want you to be comfortable when speaking with your loan officer and PITI is a term you may hear frequently. Alright, let us break PITI down in a clear and simple way.

A quick side note. You can learn more about mortgage terms by visiting our mortgage terminology page.

Breaking Down PITI

PITI is an acronym for principal, interest, taxes, and insurance. These are the four components of a mortgage. So what does each mean and how does it related to your mortgage payment.

Principal: This is the total amount of money you are borrowing from the lender to purchase a home.

Interest: In short, interest is the cost of borrowing money. Depending on market conditions your interest rate may be higher or lower. The Interest is represented as a percentage. When you make a mortgage payment part of the amount goes to pay down the principal while another portion pays the interest. The interest is one way the lender makes their money for lending you the money.

Taxes: With each property, there are taxes that are associated with it. Taxes will differ depending on the location of the home. Typically they are calculated by the assessed value of the home. Your local government uses the assessed value to assign it a tax rate. Taxes are rolled into your mortgage payment.

Insurance: Your home must be insured to satisfy lending requirements. This payment will also be rolled into your monthly mortgage payment. Home insurance will vary greatly depending on the location and type of property including size, age, condition and a number of other factors. Shop multiple insurance companies like All State, Progressive, State Farm and others for the best prices to keep your payments as low as possible.

Keep in mind you may also need to pay mortgage insurance also known as MI (or PMI). If your down payment is less than 20% of the purchase price you can expect MI will need to be included. Mortgage insurance protects the lender, not you, in the event that you fail to make your payments. This too increases the cost of your loan.

Why Homebuyers Need to Understand PITI

One of the most important parts of shopping for a home is determining your budget. Be sure to take some time to figure out exactly how much money you bring in each month and how much in monthly debt you have. Determine how much you can afford comfortably per month in a mortgage payment.

Homebuyers frequently don’t factor in all of the PITI expenses into the homebuying equation. Instead, they only look at the principal and interest and leave out taxes and insurance. This is obviously a mistake. The shoppers will probably find a home they believe is within their budget but ultimately is not.

Calculating PITI

It is absolutely imperative to estimate your payments properly so you can compare the different properties you are considering. Two homes may be similarly priced but can have vastly different monthly payments. Factoring in taxes and insurance makes the difference.

Focusing on PITI and not just principal and interest is a much better way to get an accurate picture for the cost of homeownership. You can use our mortgage payment calculator to assist you with figuring out your total payment. Once you have found a home and have considered all the PITI components that fit within your budget you will want to speak to a mortgage broker to get a pre-approval and an even more accurate monthly payment for the property.

How Much Can PITI Affect A Monthly Payment

Looking at a quick example of how PITI affects monthly payments should tell you all you need to know about how important it is to consider all parts of the mortgage. Take a look at a loan scenario if you only calculated the payment for principal and interest and you have a budget of $700/month.

30 Year Mortgage
Home Price: $150,000
Interest Rate: 4.25%
Down payment: 10% ($6,375)

Principal and Interest Payment is $675.

Only considering principal and interest it looks like this property might be one you can afford. You get excited, call a real estate agent, look at the property and fall in love. The agent then tells you to get a pre-approval so you can put in a stronger looking offer to the seller.

When you meet with your mortgage broker about the property and they factor in PITI you would be shocked at what the actual monthly payment is.

Home Price: $150,000
Interest Rate: 4.25%
Down payment: 10% ($6,375)
*MI because down payment is less than 20%: $96/month
**Property taxes $3600/year: $300/month
**Homeowners Insurance: $65/month

Total monthly mortgage payment is $1,136.

That’s a big difference. Suddenly a home you thought you could afford becomes nothing more than a dream. The importance of understanding what makes up a mortgage payment will help you and your agent understand better what properties fit your financial needs and will keep you from getting your heart broken. Note that MI, taxes, and insurance will vary. In some areas, the payment might have been lower. In others, it might have been higher but hopefully, you see our point.

Other Things To Keep In Mind

As an additional tip to your home buying search we recommend you consider other costs of homeownership like utility payments, maintenance, and repairs. If it is a larger home or an older home the costs to maintain it might be greater than what you are used to. Be sure to evaluate the entire home from all financial angles. Making a list of estimated costs to live in the home can help.

Good luck with your house hunt.

*Varies. Loan type can also affect cost.
**Varies by location and company. Prices used in the example were estimates and not exact and will vary for each buyer.