In any industry, acronyms are common. They are an effective way to shorten a series of words commonly used together. In the real estate industry, PITI is a very common one, but not all buyers are aware of what it stands for. PITI is an acronym for Principle, Interest, Taxes, & Insurance. This refers to the total monthly payment that will be needed to purchase a home.
When you are determining how much money you can borrow, the lender will want to know all four of these factors. The sum of them makes up your total monthly house payment. Let’s break them down individually:
P is for Principle. This is the amount you will pay the bank back each month that goes toward the principle amount of your loan. This amount is based on the original loan amount and the term of the loan, or the number of years you have to pay it back. The most common term is 30 years, but 15 yr, 20 yr, and even 40 yr terms are available as well. The longer you stretch it out, the lower your payments are.
I is for Interest. This is the amount you will pay the bank each month for the privilege of using their money to buy your home. Of course, the interest charged monthly is determined by the interest rate and the term of your loan. The higher your interest rate, the higher your monthly payment is.
T is for Taxes. This refers to the dollar amount of real estate taxes on that particular property. The amount you pay monthly is the annual amount divided by twelve. This applies to those who opt to make these monthly payments into an escrow account, so that when the taxes are due, the bank pays them with the money you have been depositing into the escrow account. Many loans are set up this way to ensure that the money is there to pay the taxes. This prevents the homeowner from having to come up with a large amount of money when the taxes are due. It’s a kind of budgeting method for your tax expense.
I is for Insurance. When you purchase your home, it will be necessary to also purchase home owner’s insurance. Your lender will require this to protect their investment, and you will want to protect yourself from potential losses due to hail damage, storms, fire, etc… You will choose the deductible you are most comfortable with. The higher the deductible, the more affordable the insurance is. It does pay to shop around, because the rates vary. Many people save money on their home owners insurance if they use the same provider as their car insurance. The amount of the annual insurance is divided by twelve, and this is the amount you will be charged monthly as part of your house payment. Typically, this amount is also deposited into an escrow account, so that when your premium is due, your lender uses this money to pay it. Again, many buyers find this helpful, as it keeps your monthly payments consistent. This is the easiest way to “budget” your home’s expenses.
Here is an example: Say you want to borrow $150,000. You talk to your lender, and he agrees to give you a 30 yr loan at 5% interest. Your Principle & Interest portion of your total payment is $805.23. But remember you still need to factor in Taxes & Insurance. If the total annual property taxes are $2800, then the monthly amount will be $2800 divided by 12, or $233 per month. This is the amount represented by the “T” in the PITI acronym. Last of all, you need to figure in the Insurance. If your annual insurance premium is $840, then your monthly amount is $70. Now you add these numbers together and arrive at your total monthly payment.
Loan Amount: $150,000 Interest: 5% Term: 30 years
P & I (principle and interest) = 805.23 (repayment of loan to bank)
T (real estate taxes) = 233.00
I (homeowner’s insurance) = 70.00
Total PITI payment $1108.23
So the variables are:
- The principle amount of the loan
- The interest rate the lender is charging
- The term, or length of time the lender is allowing you to repay the loan.
- The property tax amount, which is unique to each property and dependent on assessed value.
- The cost of home owner’s insurance
As you can see, there are many variables. Two properties may be priced the same, but if one has lower real estate taxes, it will have a lower monthly payment. If two properties are similarly priced, but one is in a flood plain, the insurance cost will be higher, making the payment on that property higher than the comparable property.
At your first appointment with your lender, he or she may come up with the maximum monthly payment you can qualify for. Usually, this number is the PITI mortgage payment, which just means your lender is factoring in taxes and insurance as part of your total payment. So, as you search for a home, just remember to consider the different variables that affect your monthly payment. Your agent will help you figure the PITI payment on each property to help you make the best choice.