PITI: How Does It Work?
6 minute read
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July 21, 2022

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At times, mortgage shopping can feel like something from another planet—especially when you start hearing all the mortgage and finance terms, like PITI, mortgage pre-approval, debt-to-income ratio, and more.

You’re probably asking yourself, “what does PITI stand for?” or “why is PITI important?”

What is PITI?

The word “PITI” is really an acronym for Principal, Interest, Taxes, and Insurance. P-I-T-I.

PITI is crucial when it comes to mortgage loans—it’s how your mortgage loan payment is calculated. Lenders look at your PITI to evaluate whether or not to approve your mortgage.

Knowing what PITI is can also help you understand how to budget for home buying and homeownership.

Let’s look at each of the elements of PITI individually.

Principal

“Principal” refers to the amount of money you borrowed from your lender. Principal is the base of your mortgage and the amount you need to repay. 

Each month a portion of your monthly mortgage payment goes toward the principal.

At the beginning of your mortgage term, you pay a relatively small principal amount and a large amount of interest. 

Over time, however, that reverses. 

Toward the end of your mortgage term, you‘ll be paying a relatively small amount of interest—the bulk of your monthly payment will be principal.

The more principal you pay, the more equity you build up in your home.

Depending on your mortgage terms, you may be able to reduce your principal by making special “principal only” payments or paying a larger down payment.

Interest

If your home loan is a fixed-rate mortgage, you’ll pay the same interest rate for the life of the loan. 

However, if you have an adjustable-rate mortgage (ARM), your monthly interest could fluctuate after the initial “fixed rate” period. 

Your credit score and credit history factor heavily into what interest rate you are eligible to receive. The better your credit score, the lower your interest rate. 

Taxes

The municipality where your property is located will typically calculate property taxes annually based on the appraised home value of the property you want to purchase. 

Property taxes fund public services, such as police, schools, and road maintenance.

Homeowners often pay property taxes to their lenders through an escrow account. Then your lender will pay your property taxes when they come due.

Some lenders allow homeowners to waive mortgage escrow. In that case, you’d pay your taxes directly to the local government.

Insurance

PITI can include different types of insurance: homeowner‘s insurance and mortgage insurance.

Homeowner’s insurance protects your home against damage, and many lenders require proof of insurance before finalizing the mortgage home loan. 

Your lender may require you to pay homeowner insurance fees into escrow in the same way taxes are commonly handled.

If the down payment on your home was less than 20%, you will have to pay private mortgage insurance (PMI). 

If you have an FHA mortgage through the Federal Housing Administration, you’ll also pay a mortgage insurance premium (MIP), typically 1.75% of your mortgage loan amount. MIP is included in closing costs.

Is anything else included in PITI?

Sometimes additional fees can be included in PITI such as HOA fees.

HOA fees

Depending on your new home’s location, you may also have to pay Homeowner’s Association fees (HOA fees). 

HOA fees are often included with townhouses, condos, or other planned residential complexes. Some lenders include HOA fees in PITI.

How to calculate PITI

If you like math, you can calculate PITI yourself.

Mortgage principal

  • Start by figuring out how much your mortgage principal will be. Your principal is the amount you’ll need to borrow to buy your home. 
  • To calculate your principal, subtract the amount of your down payment from the home’s purchase price. 
  • For example, if your home costs $100,000 and your down payment is $20,000, your principal will be $80,000.

Interest

  • To calculate your monthly mortgage interest rate, you’ll need to divide your annual interest rate by 12. 
  • If you anticipate a 5% annual interest rate, your monthly interest payment will be 0.0042 or 0.42 percent. (0.05 divided by 12).

How many mortgage payments

  • Next, count the number of payments needed to repay the loan. 
  • For example, if your loan term, also called the amortization period, is ten years, you can expect 120 monthly payments (10 years multiplied by 12 months per year).

If you want to do the math, the formula used to calculate PITI is: P[i(1 + i)n]/[(1 + i)n – 1]

Remember to add insurance and any HOA fees to the number you come up with. 

The simple way to calculate PITI

However, a simpler method of calculating your PITI is to reach out to a mortgage lender, like AAA Banking, or use an online mortgage calculator.

They’ll not only be able to give you the information you need but they can also help you estimate how much of a mortgage loan you’ll qualify for.

PITI frequently asked questions 

PITI may be a simple concept but is still quite involved. Let’s look at some common scenarios and questions home buyers usually have. 

How do I calculate PITI if I’m looking to refinance?

If you already have a mortgage and are curious about refinancing, you can get a rough estimate of your PITI without using an online calculator.

  • Divide the annual amount of your insurance and property taxes by 12
  • Add that total to your combined monthly principal/ interest payment

Does money down affect PITI?

Yes. The amount of your down payment will impact how much your mortgage principal is. You can reduce your principal balance with a larger down payment.

Does PITI ever change?

Yes. PITI is constantly changing because your principal balance is continually shrinking. 

And since the amount of interest you pay relies on your principal balance, the interest portion of your PITI will also get smaller over time.

How does PITI affect my mortgage?

PITI makes up how much you pay for your mortgage on a monthly basis. 

Also, while it isn’t the only factor, lenders consider your PITI when deciding how much they’ll lend you to buy your home. 

PITI is part of a careful review and assessment process to ensure borrowers can afford to repay the home loan. 

Another factor is your debt-to-income ratio (DTI), which considers your gross monthly income versus how much money you pay in debt.

You’ve calculated PITI—now what?

Before buying a home, it’s crucial to ensure you can afford the payments that come with it. 

Understanding your PITI can help you get an accurate snapshot of what your total payments will be and how much house you can afford.

If you’re considering buying a home and want to know your PITI, or have any questions about mortgages, reach out to the loan officers at AAA Banking today.

Photo by RODNAE Productions.

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