Mortgages: Principal, Interest, Taxes, Insurance (PITI)
Principal, Interest, Taxes, Insurance (PITI): Definition, Formula
By Julia Kagan and Chris B. Murphy
Principal, interest, taxes, and insurance (PITI) are the components of a mortgage payment. Specifically, they are the principal amount, loan interest, property tax, homeowners’ insurance, and private mortgage insurance premiums.
Understanding how each component of principal, interest, taxes, and insurance impacts your monthly mortgage payment is essential in determining the affordability of a home.
KEY TAKEAWAYS
● Principal, interest, taxes, and insurance (PITI) are the sum components of a mortgage payment.
● Because PITI represents the total monthly mortgage payment, it helps the buyer and lender determine the affordability of a mortgage.
● Generally, mortgage lenders prefer the PITI to be equal to or less than 31% of a borrower’s gross monthly income.
● PITI is also included in calculating a borrower’s debt-to-income ratio, which is the sum total of monthly obligations versus gross income.
Understanding Principal, Interest, Taxes, Insurance (PITI)
The principal and interest on your loan usually make up the majority of your mortgage payment. Mortgage lenders may require borrowers to buy homeowners’ insurance to protect the property from damage. You may also need to pay property taxes, depending on the state in which the home is located.
Together, the principal, interest, taxes, and insurance represent the monthly cost of buying a home. Mortgage lenders use PITI to calculate various financial ratios and the total housing expense to determine whether or not to lend you the money to buy a home. Let’s review the four components of PITI.
Principal
A portion of each mortgage payment is dedicated to repayment of the principal—the original amount borrowed. For example, if you take out a $100,000 mortgage loan, the principal is $100,000. Typically, only a small portion of your monthly mortgage payment goes to paying down the principal in the early years of the loan.
Interest
Interest is the price you pay for borrowing money and the mortgage lender’s reward for taking on the risk of lending to you. In the early years of a fixed-rate mortgage loan, a greater portion of the monthly payment goes towards paying interest rather than the principal. The ratio gradually shifts as time goes by.
For example, if the interest rate on our $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year fixed-rate loan would be $599.55. The first monthly payment would have $500 applied to interest and $99.55 to principal. Over the life of the loan, the amount of the payment applied towards interest and principal changes.
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