PITI: Your Mortgage Payment Breakdown
As you consider purchasing a home, affordability is probably at the forefront of your mind. There are a variety of great financing options that can help with affordability up front like FHA loans or down payment assistance, but what about your monthly mortgage payments going forward?
The mortgage industry is known for loving a good acronym, so naturally there is one for what goes into a monthly mortgage payment – PITI. For anyone interested in buying a house or refinancing an existing mortgage, PITI is an acronym you should remember.
PITI determines what your monthly mortgage payments will be. Depending on the exact terms of your agreement, you may have additional expenses that are bundled into your monthly costs. Mortgage lenders look at your entire PITI payment, not just principal and interest, when determining the maximum amount of your mortgage loan.
Let’s start with principal, which is the total amount of your home loan. If you purchase a $450,000 home with a $50,000 down payment, then you would finance $400,000 with a mortgage. That $400,000 is your principal, the amount you will pay off over the course of the loan term. Principal represents the largest piece of your mortgage payment.
You probably hear about interest rates in the news all the time. Lenders charge interest on every loan they extend, which is then added into your monthly payments. If you run the numbers on our mortgage calculator, you’ll see that much of your mortgage payment will go to the loan principal and mortgage interest. In many cases, lenders structure amortization schedules so interest is paid in arrears, which means that your monthly payment includes the principal plus interest on the unpaid principal balance from the previous month.
Now that you will be a homeowner, you will need to pay property taxes, which are usually included in your monthly housing costs. A portion of each payment that you make is set aside in escrow to cover your tax obligations. Typically, that monthly portion is 1/12th of the expected annual tax bill. When tax season rolls around, your lender will pay any property taxes you owe using those funds in your escrow account.
If your state allows you to file for a Homestead Exemption, make sure that you take advantage of it! You may be able to save money on what you would owe otherwise. A homestead exemption reduces the amount of property taxes homeowners owe on their legal residence.
Obtaining homeowners insurance is a requirement before your lender can approve a home loan. Homeowners insurance provides coverage in case something happens to your home, like being damaged by fire, storms, or other hazards. It also helps recoup the costs of replacing lost, stolen, or damaged possessions.
Insurance payments are often handled in the same way as property taxes, with 1/12th of your annual premium set aside in escrow each month to cover your premiums. With both taxes and insurance, you may need to prepay a few months at closing. This is to ensure that you have enough in escrow to cover those bills and is normal practice in the mortgage industry.
How PITI Effects Your Purchasing PowerWhen you apply for a mortgage, your lender will assess and verify your ability to repay that home loan. To make sure you’ll be able to afford your monthly mortgage payment, they will compare your projected PITI to your gross monthly income. This helps them determine how large of a monthly payment and loan amount you can afford on your current budget.
Typically, your PITI combined with our existing monthly expenses, such as student loan debt and auto loan payments, should take up less than 43% of your gross monthly income. This is known as your debt-to-income (DTI). Your credit history, existing debt, and DTI are all considered along with PITI to determine if you can qualify for the home loan.
Getting Pre-Qualified – The First Step
It’s important to consider all the costs of a mortgage when you’re estimating how much home you can afford. But you don’t have to do it alone! Our loan officers will help you determine what your goals are and guide you every step of the way. Find a local Loan Officer near you here.
Getting pre-qualified is the best first step to take so you will know exactly what you can expect to be approved for. This will help significantly when looking at homes and can even help your officer get accepted because the Seller will know that you are serious.