Disclaimer: This content may include information about products, features, and/or services that The Federal Savings Bank does not provide and is intended to be educational in nature.
If this is your first time getting a mortgage, you’re probably doing your best to keep up with all of the new acronyms and terminology. One that you’ve likely heard by now is PITI, meaning principal, interest, taxes, and insurance. But even though you may know what PITI stands for, do you know why it’s important?
PITI is one of many metrics by which lenders assess borrowers during the mortgage process. In this article, we will explain PITI, its individual parts, why it matters, and what you can do to affect it.
Breaking Down PITI
As stated above, PITI stands for principal, interest, taxes, and insurance. These are the four main components that come together to make a mortgage payment. But, of course, there are other recurring costs associated with homeownership, such as a homeowners’ association fee. Sometimes, lenders will include HOA fees in PITI, adding an “A” to the acronym (PITIA) for association fees.
Although the amounts for each part of PITI may change over time, your lender will consider the initial amount during your loan process. Below, we’ll explain what each of these means.
Principal
Your principal is the money you owe back on your loan. If you bought a house for $400,000, and put down $40,000, you would likely have borrowed $360,000. That amount that you borrowed is your principal. As you make payments each month on your mortgage, a portion of that payment generally goes toward your principal.
During the earlier portions of your loan term, it’s not uncommon that the amount going toward your principal is lower. A larger part of your payment will probably go toward interest initially. But if you continue making regular payments, toward the later part of your loan term, more of your monthly payment should go toward the principal.
Interest
You can think of interest as the price you pay to borrow money from a lender. It’s generally expressed as an annual rate, and that rate is a percentage of your principal amount. So, as you can imagine, if your principal amount is higher, your interest probably will be, too, and vice versa.
Different lenders may be able to offer different interest rates, which is why it’s often encouraged that borrowers shop around to a few lenders before getting a mortgage. Once you close on your mortgage, you should receive an amortization schedule from your lender that shows projected payment amounts for principal and interest over the course of your loan term.
Taxes
“Taxes” in PITI generally refers to property taxes. Often these taxes are paid annually. They are calculated based on where you live (state, county, city/municipality) and on the value of your property. Instead of paying these annually, or bi-annually, on your own, it’s not uncommon that your lender will set aside a portion of your property taxes each month in an escrow account to be paid once the bill is due.
Property taxes vary based on where you live, and they can also change each year. If you want to know more about your potential property tax rate, reach out to your county’s tax assessor.
Insurance
There are two main types of insurance to think about in relation to PITI: homeowners’ insurance and mortgage insurance. Each has a distinct purpose.
Homeowners’ insurance is there to cover your home and belongings (depending on how much you pay to cover) from damage or loss. Depending on your policy, it can protect you from certain liability issues as a homeowner, too. Lenders typically include this cost in your PITI. Mortgage insurance, on the other hand, is not always included in PITI.
On conventional loans, mortgage insurance, often called private mortgage insurance (PMI), exists to protect your lender in case you default on your loan. Generally, it is required by lenders when borrowers pay less than 20% of the home value with their down payment.
If you aren’t able to put down that large of a down payment, it’s still worth noting that PMI isn’t meant to be permanent. It should automatically be removed once your principal reaches 78% of the home value, or you can request its removal on the date your principal is scheduled to reach 80%.
Why does PITI matter?
When your lender is analyzing your qualifications for a mortgage, they’ll likely use the projected PITI as a benchmark. Will your income be enough to sustainably pay your mortgage, in addition to other debts, fees, and obligations? That’s why lenders will also look at your debt-to-income (DTI) ratio to determine whether you can afford the mortgage.
How do you calculate PITI?
You can get a rough estimate of your PITI by taking a few steps:
- Figure out your principal loan amount. Then, calculate interest based on the rates you’re seeing.
- Look into the property taxes in your area.
- Find homeowners’ insurance estimates. You can get quotes from providers or look for averages if you’re just trying to get a very rough idea of the potential cost.
- Add all of those monthly numbers together, and you’ll have a loose estimate of what your PITI might look like.
Of course, your actual PITI may differ from that number depending on what your lender determines.
Can you reduce PITI?
Yes, borrowers can reduce their PITI in a few ways. Working on improving your credit score could potentially help borrowers qualify for a lower interest rate. Saving up for a larger down payment would reduce your principal loan amount, and a 20% down payment could also eliminate private mortgage insurance on conventional loans. If you already have a mortgage, depending on your financial situation and the current interest rates, you may be able to lower your PITI by refinancing.
Final Thoughts
As a homebuyer, it’s useful to have an understanding of PITI before heading into your mortgage process. You can find some of the relevant information that could contribute to your payment on your own, but it’s usually best to talk to your lender for the most accurate numbers. Knowledge is your best friend during the mortgage process, so don’t be afraid to ask questions!
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
