What Is PITI When Paying Down a Mortgage?
PITI is short for principal, interest, taxes and insurance, and lenders combine all four elements to qualify you for a mortgage. Your PITI can change over time even if you have a fixed-rate mortgage, and understanding these potential changes can help you avoid taking on a bigger payment than you can afford.
PITI: How your mortgage payment works
Every month your mortgage payments cover at least the principal and interest needed to repay your loan. Plus, your lender typically adds your property taxes and homeowners insurance to your payment.
Below is a breakdown of each expense.
The “P” in PITI stands for principal, and it’s the portion of your monthly payment that’s applied to your loan balance. When you first take out a mortgage, very little of your monthly payment goes toward paying off the balance. However, as your loan balance shrinks with each payment, you gradually pay more principal than interest until it’s paid in full.
The term principal also refers to the total lump sum amount you borrow. For example, if you buy a $300,000 home with a $50,000 down payment, your principal amount is $250,000.
Interest is the first “I” in PITI, and it’s charged based on the interest rate you locked in when you closed on your loan. Because the interest is based on the loan balance, it’s the highest at the beginning of a loan term, but drops as the balance is paid down. It’s possible to reduce how much interest you owe by making extra payments or choosing a shorter loan term to pay off your mortgage faster.
THINGS YOU SHOULD KNOW
Your mortgage payment stays the same, even though the amount of principal and interest you pay changes, because of a process called mortgage amortization. Your closing paperwork typically includes an amortization schedule, which shows how much principal and interest is applied to each payment over the life of your loan.
Property taxes are typically assessed annually but are payable twice a year. However, many homeowners choose the convenience of having property taxes included in an escrow account, which involves dividing the total tax bill by 12 and adding it to your monthly payment. The escrow account acts like a forced savings account and, by law, the lender must use the funds to pay the property tax bills when they are due.
Property tax rates change depending on a variety of factors, which may result in an increase or decrease in your PITI payment over time.
The second “I” in PITI stands for insurance. There are two types of insurance that may apply to your mortgage payment: homeowners insurance and mortgage insurance.
Homeowners insurance. Your lender will require you to pay for homeowners insurance to protect their interest in your home in the event of damage or theft. In particular, if you live in an area prone to natural disasters like earthquakes or floods, you may need to purchase additional coverage. Like property taxes, the annual premiums are typically divided by 12 and added to your total mortgage payment.
Mortgage insurance. If your down payment is less than 20% on a conventional mortgage, you’ll probably pay private mortgage insurance (PMI) to protect your lender from losses if you default and it has to foreclose on your home. There’s some good news though: Once you’ve built up 20% home equity you can get rid of PMI, which will lower your total PITI payment.
Loans backed by the Federal Housing Administration (FHA) require FHA mortgage insurance regardless of your down payment. With a minimum 3.5% down payment, you’re stuck paying the monthly mortgage insurance premium (MIP) for the life of the loan. If you can put down 10% upfront, though, you can cancel the MIP after 11 years.
THINGS YOU SHOULD KNOW
Lenders typically require an escrow account if you make a down payment of less than 20%. Because property taxes and homeowners insurance premiums can rise and fall over time, your monthly PITI payment may fluctuate. However, you can appeal your property taxes if you think they’re too high. You should also compare homeowners insurance companies each year if you notice a big bump in your premium.
How to calculate your PITI payment
You can calculate your PITI easily by using an online tool, like LendingTree’s home loan calculator. To get the most accurate payment possible with our calculator, you’ll need to know either your actual or estimated:
- Home price
- Loan term
- Down payment amount
- Mortgage interest rate
- Property taxes
- Homeowners insurance premium
By using a calculator to crunch the numbers for your PITI payment, you can decide whether a home you’re interested in buying is truly affordable.
Why PITI matters when you’re getting a mortgage
Lenders use the PITI amount when they calculate your debt-to-income (DTI) ratio, even if you pay your property taxes and homeowners insurance separately. If you assume you can afford a home just based on the principal and interest costs, you may be disappointed when a lender preapproves you for much less than you expected based on your PITI payment.
The following example assumes a buyer earns $65,000 per year; makes a $500 per month car payment and $600 per month student loan payment; and has 20% to put down on a $350,000 home. The payment figures are based on a $280,000 principal balance at a 3.75% interest rate. We’ll also assume the lender’s DTI ratio maximum is 45%.
|Payment used for qualifying||DTI ratio||Does the borrower qualify?|
|$1,297 (principal and interest)||44.2%||Yes|
*Assumes $1,225 per year homeowners insurance premium and $4,375 per year property tax bill.
Using just the principal and interest calculations, it looks like the homebuyer barely qualifies for the loan amount. However, that homebuyer will find out they don’t qualify at all when the lender uses the PITI calculation, which pushes the DTI ratio well over the 45% maximum.
What’s not included in your PITI?
PITI will give you a rough idea of whether you can afford a home. However, if you’re trying to pinpoint how much you can afford, you’ll also need to consider three additional costs that are typically associated with homeownership:
- UTILITIES.Lenders don’t consider how much you pay for electricity, gas, water, sewer, trash, cable and internet bills, but you’ll need to budget for them to keep the lights and air conditioning on. If you’re unsure of what to project for potential utility payments, ask the seller or your future neighbors about their average costs.
- MAINTENANCE AND REPAIRS. Many experts recommend setting aside at least 1% of your home’s value each year to cover unexpected repairs and maintenance.
- CONDO OR HOA FEES.Condo or homeowners association fees typically aren’t included in mortgage payments, but lenders will consider them while qualifying you for a loan. One note: It may look like HOA fees are part of your PITI payment if you use an online mortgage calculator, but they are paid separately to your neighborhood’s association. High HOA or condo association fees can sink an approval if you’ve maxed out your PITI on your mortgage preapproval.
Frequently asked questions
Can PITI ever change?
Yes, it can change if your homeowners insurance or property tax bill goes up or down over time. If you take out an adjustable-rate mortgage (ARM), your principal and interest may change after the initial low-rate period ends, depending on the ARM terms you select.
Can I lower my PITI without refinancing?
Yes, you can. Appealing your property tax bills and shopping for a better homeowners insurance premium are good ways to reduce your PITI without refinancing. You can also ask your lender about removing private mortgage insurance if you’ve built up at least 20% equity since you bought your home.
Are taxes and insurance always included in PITI?
Conventional lenders typically don’t require an escrow account if you make at least a 20% down payment.
Do I have to escrow my taxes and insurance?
In most cases, you’ll have to escrow your taxes and insurance if you take out an FHA– or USDA-backed loan, or are paying delinquent property taxes with money from a cash-out refinance. Conventional lenders typically waive the escrow requirement with at least a 20% down payment.
Does PITI include mortgage insurance?
Yes. Mortgage insurance is typically included in your PITI payment.
Does my down payment affect my PITI?
Yes. The higher your down payment, the lower your PITI payment will be.