What does PITI mean?
From FHA (Federal Housing Administration) to FRM (fixed-rate mortgage), and DTI (debt to income) to LTV (loan to value), the number of acronyms and abbreviations you encounter when house hunting may leave you shouting "SOS!" Here's another one you've probably come across: PITI. Shorthand for "Principal, Interest, Taxes and Insurance," the letters PITI represent the basic components of a typical monthly mortgage payment.
While the alphabet soup may sound confusing, don't worry. By breaking each down one by one, you may find it's as easy as learning your ABC's. Well, almost.
P is for Principal
The principal is the most basic, foundational component of a mortgage payment. It's the amount of money that you borrow to purchase a property, which you pay back in installments over an extended period. For example, on a 30-year FRM (there's that abbreviation again), you have 30 years to pay the principal amount back. Over time, with each payment you make, the principal diminishes, getting you one step closer to owning your home sweet home outright.
I is for Interest
When it comes to mortgages, interest runs part and parcel with principal. Interest is basically the amount of money that you pay in order to borrow a specific dollar figure. It's represented as a percentage, or more specifically, annual percentage rate (APR).
Where the P and the I coincide is in terms of what your monthly payment actually goes toward: the principal and/or the interest level. As time passes, the amount you pay in principal each month goes up slightly. Correspondingly, what you spend on the interest goes down. The two will eventually reverse positions with the principal taking up the lion’s share until both are paid off.
If you have an adjustable rate mortgage (ARM), the fluctuations could be more substantial with any rate changes.
T is for Taxes
The "T" in PITI refers specifically to real estate or property taxes. Everyone who owns a house is required by law to pay them to the municipality. Taxes fund various services or institutions that may include:
- Public schools
- Roads and bridges (upkeep, installation, construction, snow removal, etc.)
- Fire departments
- Police departments
To make paying property taxes easier and more convenient, a portion of your monthly payment goes toward this amount. So instead of saving up and submitting it every year, your lender will handle this process for you by setting up an escrow account. Generally speaking, the amount collected for property taxes is equal from month to month unless your tax bill changes.
It's important to be mindful that once you've paid your mortgage in full, you still have to pay property taxes. You may therefore want to set up an account to make regular contributions to it over time so you're not left scrambling when the property tax bill comes due. If you run the numbers and contribute consistently, you should be all set.
I is for Insurance
Last but certainly not least is insurance. In the residential real estate space, insurance can refer to one or all of the following:
- Homeowners or hazard insurance
- Flood insurance
- Mortgage insurance
Usually when you buy a home, homeowners or hazard insurance is required. But it's really an investment, as the proceeds can be used to help you get back on your feet should your home be damaged by things like fire. Depending on where your property is located, you may also need flood insurance or possibly hurricane insurance.
You may also be required to purchase mortgage insurance if your loan-to-value (LTV) is above a certain percentage. This is something that protects your lender in the event you're unable to repay your loan.
Long story short, the smallest portion of your monthly payment services insurance expenses. And, much like the "T," payments are usually held in an escrow account and the amount deducted is the same each time unless your premium changes. This is all designed to provide flexibility, consistency and simplicity.
PITI mortgage payments make budgeting easier to manage. If you have any questions about PITI — or any other homebuying issue, abbreviated or otherwise — Contact us at Residential Mortgage Services today.