A monthly mortgage payment can be referred to as PITI, which has four components:
After obtaining a home loan, you back your principal balance over many years in the form of a monthly payment, which also includes some amount of interest. You will also likely pay property taxes and insurance as part of your monthly mortgage payment, which the lender puts into an escrow account to pay each year.
PITI is your entire monthly payment if you put down less than 20 percent on your home.
The loan amount is the principal balance. Your monthly mortgage payment typically includes some amount that goes toward your balance. Your principal will slowly go down as you make payments.
With most loans, the principal component of a PITI is very small at first, especially with a long-term 30-year mortgage. For the first few years of the loan, you pay little toward your balance. By the end of your loan, most of your payments go toward the balance.
The interest component of your PITI is the rate we charge to extend the loan to you. The interest rate is complex, as it is determined by several factors, like the type of loan, the type of property, your location, the size of your down payment, current market conditions and your credit score.
With a fixed-rate loan, your interest rate is the same for the life of the loan. With an adjustable-rate mortgage, or ARM, the interest rate will periodically adjust to current market conditions.
For the first few years of your loan, interest is the largest component of your PITI payment.
City and state governments levy taxes on most purchases, including real estate purchases. Your tax portion of your payment is your local property tax. Lenders usually collect annual taxes from you in the form of a monthly addition to your mortgage payment, which is then used to pay local authorities.
Tax rates vary, based on where your home is located. You may have a higher tax bill if you buy in a high-end real estate market. Your tax component of your monthly payment may be large or small. The tax payments you make will be held in an impound account, or escrow account, which is used to pay your obligation.
We want to make sure your home is protected in case you default. You will need homeowners insurance to protect our interest, and you may be required to get additional insurance like flood coverage. If you put down less than 20 percent on a conventional loan, you will also be required to pay private mortgage insurance (PMI), which will be added to your monthly payment.
You can use a PITI calculator to break down your monthly mortgage payment. Ask your us for an explanation of each component and how they will change year by year.