What Is PITI

PITI stands for principal, interest, and taxes, which make up the mortgage payment. Principal, Pays off the outstanding loan amount interest the cost of borrowing. Taxes are property taxes. insurance applicable include homeowners insurance and mortgage coverage.

Frequently, first-time home buyers shopping for a new home might only factor into their budget potential mortgage payments (principal amount borrowed plus interest) without considering that the cost of homeownership also includes property taxes and homeowners insurance, whether it is billed and paid separately or paid through the mortgage lender. It is important to compare the quotes of prospective mortgage lenders. You can compare PITI and PITI, or just the principal and interest. This is a close look at the structure of each PITI component and what you should know.

What Is The Principal?

This is the amount you borrowed from the lender to purchase your home. Typically this amount will be the sale price of the home minus any down payments you made. A portion of your monthly payments will go towards reducing the principal as you pay down your mortgage each month.

On some occasions, one might have an interest-only loan, in which case payments go toward the interest first for a set period of time before a portion of the payments also starts to go toward paying down the principal.

Your payments are amortized if a portion of your payment goes towards the principal and another portion towards the interest and taxes or insurance. It is possible to pay off your principal sooner, but in some cases, you may be subject to a prepayment penalty if you do so. Here are two possible scenarios.

Imagine that you have a fixed-rate mortgage with a 30-year amortization. You make monthly payments to your lender. However, seven years later, you decide to sell or refinance your home. The new lender you use for the refinance, or the buyer of your home, pays off your lender. This is technically pre-paying your principal and paying off the mortgage before the end of the 30 years. Usually, however, you hear the "pay off" part of the loan.

You can make additional monthly payments on most mortgage loans. You might want to pay $50 more per month towards your mortgage payments or write an additional payment once a year to reduce your loan's interest rate. This payment should be applied to your principal. You can reduce your principal by a little each year to make your loan payoff faster than it takes for 30 years.

What Is Interest?

The interest is the cost that the lender charges to the borrower in exchange for the loan being made. There are three types of interest: fixed-rate, adjustable-rate month (ARM), and no-interest. A fixed-rate mortgage means the interest rate will not change over the life of the loan. An adjustable-rate mortgage means the rate will fluctuate based on the prime rate and a standard percentage the lender adds on. Some ARMs have a fixed rate that adjusts upward. This means that if the prime rates go down, your mortgage rate will not change but will instead rise with it. No matter what interest rate you have, the interest that accrues monthly on the principal balance is the same regardless of which type.

The less interest you pay, the sooner you pay off the balance. A lower interest rate may be possible for you if your credit score is higher. A higher down payment will result in a lower interest rate. This is because the lender has an equity stake in the home. If you default, the lender will take your home. This means that they will have less to invest in something more valuable than what they put in. Because it takes a shorter time for lenders to recover their investment, short-term loans have better rates. If you have excellent credit and clean credit history, you are more likely to receive the best interest rates. Also, a shorter-term loan, such as a 15-year loan, is better than a 30-year loan. You can also get a lower rate if your down payment is 20 percent rather than 5 percent. You can deduct a portion of the interest that you pay each year on your federal tax returns.

What Are Taxes?

Taxes are the property taxes that you must pay to your county. You can pay the tax directly to the tax assessor, but in many cases, mortgage lenders prefer to have them escrowed and pay them on behalf of you, so the lender is aware that the taxes are being paid. While it may seem like a convenient option for you to have your lender pay your taxes for you, as you only need to write one check per month, the lender really only cares about its bottom line. The government could foreclose your home if you fail to pay your taxes. This would leave the lender in a difficult position. The lender has lost far less money than it invested, and the lender cannot easily recover any late payments on your mortgage. A portion of your property taxes is tax-deductible.

What Is Insurance?

This refers to homeowner's insurance that you have to pay based on the value of your property and the likelihood of replacing it or fixing it in some way should it become structurally damaged (say be hail, wind, fire or some other external sources. Your homeowner's insurance usually covers theft.

Your mortgage lender may also have an interest in paying your insurance premiums so it can protect its financial interests. The lender will likely require that you have hazard coverage. Your lender will likely require you to have hazard insurance coverage. This covers more money in the event that your house is set on fire. Flood insurance and insurance that would cover natural disasters are often add-on coverage. However, your lender will collect these payments in escrow along with the insurance company. Flood insurance is only required by the lender if you are in a flood zone.

Private mortgage insurance can sometimes be paid via your PITI. PMI is not mandatory for all borrowers. However, those who contribute less than 20% to the purchase will need to pay it. And under new FHA regulations, a similar mortgage insurance premium has to be paid throughout the life of the loan on an FHA-backed mortgage loan. PMI does not protect your interest if you are unable to repay your mortgage. Instead, it assists the lender in recouping its costs in case you become financially unable.

Your premiums can affect your insurance rate and impact your monthly payments. Switching insurance companies is possible. You can shop around to find a better rate. The lender will escrow the payments and pay the insurance company, but you can choose your own insurance provider. If your premium has changed, the lender will notify you and adjust your payments.