Principal, interest, taxes and insurance. Otherwise known as monthly housing expense.
PITI is an acronym for how much you are paying each month to buy your house, insure it and pay property taxes on it. When you make your monthly mortgage payments, only a portion of the payment goes to paying down the original loan amount, or the principal. It can be a little surprising in the early years of a mortgage to realize how little of the thousands of dollars in PITI is actually going toward the purchase price of your home.
Gradually, though, depending on the type of mortgage you have, more of your monthly PITI payments go toward the principal. The more principal you have paid, the more equity you have in the property. Interest-only loans do not include principal payments.
The interest portion of PITI is usually the biggest chunk of your monthly mortgage payment. Interest is something a lender charges you for borrowing the money. The good news is that mortgage interest is tax-deductible, lowering your annual tax bill. Depending on what kind of mortgage it is, the interest paid each month will often drop over the life of the loan.
Property taxes can also represent a substantial portion of your PITI. Depending on how the mortgage is set up, lenders will collect money every month for annual real estate taxes as part of the mortgage payment and then pay the tax bill on your behalf. The tax office sends a bill to the lender at the same time it sends one to you. You do not have to do anything. The tax portion of PITI can go up and down as local tax rates change, potentially changing your monthly mortgage payments.
Finally, PITI may include payments for two types of insurance: homeowner’s insurance and private mortgage insurance. Depending on the policy, homeowner’s insurance covers damage to your home and property from theft, and from fire, hail and other kinds of disasters. The lender pays the insurer directly.
Lenders usually require private mortgage insurance (PMI) for borrowers who pay less than 20 percent of the home’s value as a down payment. It protects the bank’s investment in your loan in the event of default.
If you pay property taxes and/or insurance separately, you can calculate your monthly PITI by taking your annual tax and insurance bills, dividing by 12, and adding that amount to your monthly principal and interest payments.