What Is PITI? Its Meaning And What It Stands For

If you’re on the hunt for a mortgage loan, you may notice the acronym PITI appear in your search queries. So, what exactly is PITI, and what does it stand for?

Let’s walk through the components of PITI and learn how to calculate your PITI. Then, we’ll consider how your PITI ratio sets you up to have a manageable and sustainable monthly mortgage payment. 

PITI is an acronym that stands for principal, interest, taxes and insurance. Many mortgage lenders estimate PITI for you before determining whether you qualify for a mortgage.

Lending institutions don’t want to extend you a loan you might have trouble affording. That means it’s a good idea to understand the mortgage preapproval process (also called initial approval) and work with a lender before you start shopping. Your lender can help you start the process with an understanding of what PITI you can afford so you can shop accordingly.

Now that we know the definition of PITI, let’s break down each of its components and analyze their significance.

Principal

The principal of your mortgage loan is the amount you owe before any interest is added. For example, if you buy a home worth $250,000 and put forward a 20% down payment ($50,000), your principal amount would be $200,000.

However, over the course of your loan’s lifespan, you’ll pay more than your original $200,000 because of interest. Most lenders look at your principal balance and debt-to-income ratio (DTI) when they determine what interest rate you’ll pay.

Your DTI is a calculation of your ability to make payments toward money you’ve borrowed. It’s the total sum of your monthly debt payments divided by your gross monthly income. DTI is always expressed as a percentage.

Interest

An interest rate is a percentage showing how much you’ll pay your lender each month as a fee for borrowing money. Your mortgage lender calculates interest as a percentage of your principal over time. For example, let’s say your principal loan is $200,000 and your lender charges you a 4% interest rate. You’ll pay $8,000 (4% of $200,000) in interest for the first year of your mortgage.

You may hear the term mortgage amortization in reference to your interest and principal payments. Amortization is a scale that tells you how much of your monthly mortgage premium is applied to your principal loan balance and how much goes toward interest.

How Much Do You Pay In Interest?

At the beginning of your loan, most of your mortgage payments cover interest instead of principal. As your loan matures, the amount of interest you pay decreases because the principal decreases. That is, you only have to pay interest on the portion of the loan you haven’t paid off.

For example, you may pay $8,000 in interest on the first year of your $200,000 mortgage. But by the time your principal decreases to $50,000, you’ll pay only $2,000 annually (4% of $50,000).

This is why it’s so important to choose a home within your price range. It’s easy to fall behind on payments if you can’t pay off your interest and also make progress on decreasing your principal.

Taxes

You must pay taxes on your property. They’re an important component to consider when determining how much you can afford. One of the most expensive taxes most homeowners pay is property tax, which varies by location.

Property taxes support your local community. They pay for services like libraries, local fire and police departments, public schools, road maintenance, park maintenance and community development projects.

How Much Do You Pay In Taxes?

It’s difficult to say exactly how much you can expect to pay in taxes because they depend on your home’s value and your local property tax rate. Taxes can also vary from year to year.

As a rule, anticipate paying $1 for every $1,000 of your home’s value every month in property taxes. For example, if your home is worth $250,000, you’ll pay around $250 per month in property taxes – or about $3,000 per year.

Most states require you to get an official and unbiased home appraisal so they can accurately estimate your taxes. Your mortgage lender usually includes the cost of an appraisal in their list of closing costs.

Insurance

Most states’ laws don’t require homeowners insurance. But most lenders require you to maintain a certain level of property insurance as a condition of your loan. Most homeowners insurance plans cover your property if a fire, lightning storm or break-in occurs, leaving property damage.

As an add-on, some homeowners insurance policies include additional coverage for damage from flooding and earthquakes. If you have something valuable in your home, like an expensive piece of artwork, jewelry or a musical instrument, you may purchase a high-value layer of protection called a rider. This is available in addition to your standard policy.

How Much Do You Pay In Homeowners Insurance?

As with property taxes, it’s difficult to say exactly how much you’ll pay in homeowners insurance. Every insurance company uses its own unique formula to calculate rates. Factors that often influence your insurance premium include:

• Your home’s value

• Whether you live in a rural or urban area

• Your home’s proximity to a fire department or police station

• Nuisances on your property or something that could injure children who enter your property (pool, trampoline, aggressive dog, etc.)

• How many claims you make on average each year for other types of insurance

As a general rule, expect to pay about $3.50 for every $1,000 of your home’s value for homeowners insurance. In this example, you’ll pay $875 per year on a property worth $250,000, equaling about $73 per month.

When you add the costs of your principal, interest, taxes and insurance together, you get the average total cost of a mortgage per month.

The easiest way to incorporate PITI into your home buying journey is to get started with a lender. Upon doing so, your potential lender will do PITI calculations for you and let you know what you can afford.

However, the home buying procedures don’t always go in a straight line. You may start the process because you’ve spotted a home you love, but you don’t yet have an initial mortgage approval. In this case, it’s a good idea to calculate your PITI yourself to see if it’s in your budget.

Mortgage lenders will work with any borrowers who qualify and it’s also important to note that some loan types don’t even have a housing ratio requirement. When securing a loan, your interest rate will depend on your credit score and how much you can offer for a down payment.

Let’s say you earn about $7,000 a month and you like a home that’s going to need a $300,000 mortgage (after your down payment). Let’s also suppose you meet with a lender who says you can get a 4% interest rate.

To calculate your PITI on a 30-year fixed-rate loan, consider the following steps.

1. Assess Your Principal And Interest

There’s a specific formula used for calculating mortgage payments designed to determine principal and interest. It looks like this:

M = P [ I(1 + I)^N ] / [ (1 + I)^N − 1]

“M” represents your mortgage payment and “P” represents your principal amount. “I” is your monthly interest rate (you’ll divide the given interest rate by 12 months) and “N” is the number of monthly payments you’ll make over the life of the loan. Using the mortgage information above, we plugged in the data for you. Here’s what that looks like:

M = 300,000 [0.0033(1+0.0033)³⁶⁰ / [(1 + 0.0033)³⁶⁰ - 1]

Work through this formula and your monthly mortgage principal and interest will amount to about $1,432.25 per month. Alternatively, you can also use our mortgage calculator to save a little bit of time and calculation.

2. Estimate Your Property Taxes

To calculate estimated property taxes, divide your home’s value by 1,000. Then multiply that number by $1 to find your monthly payment. In this example, $300,000/1,000 is $300 – a single month’s worth of property taxes.

Check your state government’s website to see if there’s a property tax estimator. This will give you the most realistic amount for the property taxes you’ll have to pay after buying your new home.

3. Determine Your Insurance Payment

To calculate your insurance payment, divide the value of your home by 1,000. Then multiply by $3.50 and divide by 12 to find a year’s worth of insurance payments.

$300,000/1,000 = $300, $300 ✕ $3.50 = $1,050, and $1,050/12 = $87.50, a month’s worth of homeowners insurance.

4. Calculate Your PITI

Finally, add together all three numbers for your PITI estimation: $1,432.25 + $300 + $87.50 = $1,819.75, your PITI.

Divide your PITI by your total monthly income to find your ratio. If you earn $7,000 a month, your PITI would make up about 26% of your monthly budget. This means the property is likely a reasonable choice for your finances.

Your PITI matters because it gives you a rough idea of how much you can afford on a home purchase. That’s why it’s important to calculate a reasonable PITI before shopping. You’ll save time and stress if you only consider homes within your budget.

Additional Costs To PITI Payments

Keep in mind, your monthly PITI may not cover the entirety of home buying costs. You may need to budget for repairs, utilities and maintenance on top of your mortgage payments, taxes and interest.

You also need to plan and budget for the down payment and closing costs required by your lender. Some of the closing costs you may see include:

• Home inspection fees
• Real estate attorney fees
• Home appraisal costs
• Title transfer costs
• HOA fees
• Utilities

Think about all these costs, in addition to your PITI, ahead of deciding whether a home is a good investment for you.

Keep reading for more information about PITI in the form of these frequently asked questions and answers.

What is the 28% PITI rule?

Lenders prefer your PITI remain at or below 28% of your total monthly debts. The lower your PITI, the less risky it is for lenders to issue you a loan. The higher, the riskier. It’s important to keep your PITI as low as possible to give you more wiggle room in your monthly housing budget.

Can my PITI fluctuate?

Yes, taxes and insurance can increase or decrease each year, which could result in your PITI changing. Your PITI might also fluctuate if you take out an adjustable-rate mortgage (ARM). With this loan, you can receive a lower interest rate for the first 5 or 10 years. Then your interest rate can increase, which would increase your PITI.

What can I do to lower my PITI?

To lower your PITI, you can put down a bigger down payment. You may also be able to lower your PITI by shopping around with different lenders to find a lower interest rate. If you’re looking to lower your PITI after the mortgage term begins, look into refinancing your original loan.

Can I pay for taxes and insurance separately?

Yes, in some cases, you may be able to opt out of using an escrow account for taxes and insurance. You can then pay these dues on your own as they come due each year. But you’ll likely only be able to avoid escrow with a 20% down payment on a conventional loan. Requirements can vary by lender and by loan type.

The more you understand the home buying process, the easier the process will seem. After all, buying a home can be one of the most exciting endeavors of your life. Working with a lender can help you understand what PITI you can afford.

Feel ready to take the next step? Get started on a mortgage application today with Rocket Mortgage^®.