What Is a PITI Payment? Understanding Principal, Interest, Taxes and Insurance
PITI is short for “principal, interest, taxes and insurance,” and lenders combine all four elements to calculate your total monthly mortgage payment. As a homebuyer, the PITI acronym is arguably the most important set of letters you’ll come across during the mortgage lending process. Below, we’ll walk you through which elements of PITI can change over time — even if you have a fixed-rate mortgage — and explain how to avoid taking on a bigger home loan payment than you can afford.
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PITI: What it stands for and how it works
PITI is an acronym for the four expenses that go into a monthly mortgage payment:
More than anything, though, PITI is a helpful tool used to estimate the full cost of owning a home. We’ll cover how later, but for now let’s break down each expense.
The “P” in PITI stands for principal, and it’s the total amount you borrow. For example, if you buy a $300,000 home with a $50,000 down payment, your principal amount is $250,000, which equals $300,000 minus $50,000.
A portion of each of your monthly payments pays down your principal balance. When you first take out a mortgage, very little of those early monthly payments goes toward repaying the principal amount — instead, most of it goes toward interest costs. However, as your balance shrinks, the amount dedicated to your principal payoff grows.
Interest is the first “I” in PITI, and the interest amount you’re charged is based on your loan balance. The amount of your mortgage payment that goes to interest (versus principal) is at its highest when you first take out the loan, but as you pay down your debt, the balance shifts so that you’re paying far more toward principal than interest. You can reduce how much interest you pay over time by making extra payments or choosing a shorter loan term to pay off your mortgage faster.
Understanding fixed-rate mortgage payments
If you borrow a fixed-rate loan, your mortgage payment will stay the same, even though the amount of principal and interest you pay changes — this is due to 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.
The “T” stands for taxes — more specifically, the property taxes you pay to your local tax authority each year. Many homeowners choose the convenience of having their annual property tax bill divided by 12 and added to their monthly mortgage payment. The funds are set aside in an escrow account that your lender draws from to pay your property tax bills when they come due.
Your home’s value, as well as how much of it is taxable, can change from year to year. These and other factors can lead to fluctuations in your PITI payment over time. If you’re curious about how property taxes in your area stack up against the rest of the country, check out LendingTree’s recent study on where people pay the most in property taxes.
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.
Your lender will require you to pay for homeowners insurance because it protects their investment in your home in the event of damage or theft. If you live in an area prone to natural disasters like earthquakes or floods, you may need to purchase additional coverage. Like property taxes, homeowners insurance typically comes with an annual premium that’s divided by 12 and added to your monthly mortgage payments.
If you put down less than 20% on a conventional mortgage, you’ll pay for private mortgage insurance (PMI) to protect your lender from losses if you default. 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.
Mortgage insurance for FHA loans
Loans backed by the Federal Housing Administration (FHA) require FHA mortgage insurance regardless of your down payment amount. With a minimum 3.5% down payment, you’re stuck paying the monthly mortgage insurance premium (MIP) for the life of the loan. However, if you can put down 10% upfront, you’ll be able to cancel MIP after 11 years.
Why PITI matters when you’re getting a mortgage
Lenders set limits on how high your debt-to-income (DTI) ratio can be, and mortgage payments are typically a large part of that debt burden. If your PITI payment pushes your DTI too high, it could lead to a smaller mortgage preapproval amount — or an outright loan denial.
Your mortgage payment is typically considered affordable if it makes up 28% or less of your gross monthly income.
Example: PITI and mortgage approval
It’s important to use PITI when estimating your loan approval amount, since you don’t want to set yourself up for disappointment. Here’s an example that illustrates the difference it makes to use PITI — what most lenders use — when evaluating your home loan eligibility, versus another monthly payment model.
Let’s say you’re planning to put 20% down on a $320,000 home. You earn $70,000 annually, but you also pay $525 toward your auto loan and $250 toward your student loan each month. You’re applying for a mortgage with a $256,000 principal balance and a 6.71% interest rate. We’ll assume the lender’s DTI ratio maximum is 43%.
|Payment model used||Payment amount||DTI ratio||Does the borrower qualify?|
|Principal and interest only||$1,653.61||41.63%||Yes|
*Assumes an annual $1,120 homeowners insurance premium and $3,168 in annual property taxes.
As you can see, if you calculate your DTI using just the principal and interest, it looks like you’ll qualify for the loan. However, when the lender calculates your PITI payment, you’re well over the 43% DTI ratio maximum.
How to calculate your PITI payment
You can calculate your PITI with an online calculator, like LendingTree’s mortgage calculator. To get the most accurate payment possible, 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
Once you’ve calculated the PITI for a specific loan, you may still need help deciding whether it’s truly affordable. LendingTree’s home affordability calculator lets you simultaneously calculate your PITI payment and get an idea of how much house you can afford. Keep an eye on the DTI ratio as you use the slider to try out different monthly payments and home prices.
What’s not included in your PITI?
PITI will give you a rough idea of whether you can afford a given home loan. But if you’re trying to pinpoint your house budget, 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 still need to budget for them to keep the lights and air conditioning on. If you’re unsure 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 (HOA) 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 directly to your neighborhood’s association. High HOA or condo association fees can sink an approval if you’ve maxed out your PITI.