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PITI is an acronym that is a crucial aspect of qualifying for and paying for the purchase of a home. Learn about each of the four components, what they stand for in relation to buying a home, and the importance of considering all of these factors when planning to buy a home.
What is PITI?
The acronym PITI stands for principle, interest, taxes, and insurance. Every borrower with a home loan pays these four components.
If you make a down payment of less than 20 percent towards the purchase of your new home, then PITI payments are your entire monthly payment.
Homeowners should understand each component, and how lenders determine affordability of each individual mortgage.
Are you a good risk for your lender? Lenders use PITI when deciding whether a particular buyer is a good risk for a home loan.
The home loan qualification process varies somewhat based on individualized factors and lender qualification requirements.
Principal
The principal component of PITI involves your principal balance, and the amount of each monthly mortgage payment that goes towards payment of your home loan.
Experian contributor Ben Luthi explains that if a homeowner wants to pay down his or her mortgage faster, some lenders allow the homeowner to make extra monthly payments.
Most, or the entire amount, of the extra payment goes towards paying the principal.
Initially, small amounts of mortgage payments go towards the principal. The remaining portion of the payment goes towards interest.
The longer that you make payments, a greater portion of the mortgage payments will go towards your principal.
Interest
When you initially begin making mortgage payments, a larger amount goes towards the interest, and less towards the actual principal. The interest is the amount charged by your lender for your home loan.
Several factors determine the interest rate for each borrower that takes out a home loan. Some considerations include the type of property, the location of the property, your credit score, and the current real estate market conditions.
Interest potentially varies, depending on which type of mortgage loan you take out. Do you have a fixed rate loan, with interest rates that stay the same, or an adjustable rate mortgage (ARM), with interest rates that go up or down, depending on market fluctuation?
Taxes
You pay local property taxes through the taxes portion of PITI payments. Some lenders break down your annual property taxes into monthly payments and include it in your regular payments.
When lenders collect taxes for you, they set that amount aside in an escrow account. The lender pays the tax bill on your behalf when it becomes due.
Some lenders allow homeowners to pay property taxes on their own, rather than through the escrow account.
Property taxes potentially vary by both county and state location. The amount of property taxes likely varies from one year to the next year.
Insurance
All homeowners that receive a loan pay homeowners insurance. This protects the homeowner, as well as provides protection for the lender’s interests.
The cost of homeowners insurance varies, with some owners facing additional requirements, such as purchasing flood insurance or paying HOA dues.
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