Many mortgage payments are made up of four parts, called PITI. PITI is an acronym that stands for principal, interest, tax, and insurance. It’s important to understand PITI because it is the real number you need to use in order to find out how much mortgage you can afford to pay each month.
One of the biggest mistakes first-time homebuyers make is using only the principal plus interest figure to calculate how much they’ll be paying every month for their mortgage. Then, when the lender comes back and denies them, the prospective buyer is confused. Knowing and understanding PITI will put you back in the driver’s seat with your home buying goal.
The principal part of your mortgage payment represents the amount of money that you borrow over the terms of the loan. For instance, if you borrow $100,000 and you have 20 years to pay them back, the principal that you’ll pay each month equals $100,000 divided by 20.
The interest portion of your mortgage payment is the percentage rate that your lender is charging you to borrow from them. Another way of looking at the interest is to think of it as the cost of borrowing money. Interest will be spread out over the length of the loan, just like the principal payment.
#3 Tax (Property Taxes)
The tax portion of your monthly mortgage payment pays for real estate and/or property taxes. Real estate taxes are assessed by the local government where the properties located. The tax rate is determined by the government and is not influenced by your personal credit score.
The insurance part of your monthly mortgage payment pays for homeowner’s insurance.
Mortgage Insurance Requirements
For some folks, there will be an additional amount added to their PITI payment making it a PITIMI payment. If you put less than 20% down on your home purchase, you’re required to have mortgage insurance (MI). This amount can add considerably to your monthly mortgage payment, so it’s worth it to try to hit that 20% threshold.
- If you’re getting a conventional mortgage then you’ll need to get private mortgage insurance which you can request to be dropped once your loan-to-value ratio hits 80%.
- If you’re obtaining an FHA loan, the mortgage insurance portion of the loan will never go away. In order to not have to pay mortgage insurance, you’d need to refinance the loan.
Now that you understand what makes up a PITI mortgage payment, you’ll be better prepared to plan for your monthly budget that includes a mortgage payment. If you are in the market for a new home or interested in listing your current property, be sure to contact your trusted real estate professional.