The abbreviation PITI stands for "principal, interest, taxes, and insurance." Most borrowers' monthly mortgage payments are made up of these four items. All mortgage borrowers must pay property taxes and insurance. However, not everyone does so as part of their mortgage payment. Owners of homes in planned unit developments or townhouse/condo complexes must additionally pay a homeowner association (HOA) fee that may or may not include insurance for their specific unit.
Key Takeaways
- Principal, interest, taxes, and insurance are all included in mortgage payments (PITI).
- A homeowners association charge may be used to pay property taxes and insurance.
- PITI amounts will vary from year to year due to changes in taxes and insurance.
- Adjustable-rate mortgage PITI will also fluctuate depending on interest rates for a specific time period.
Principal and Interest?
The principal portion of your mortgage payment is directly related to the amount of money you borrowed from your lender. Some consider it the most crucial part of the payment because it decreases your mortgage's outstanding balance. The principal component of your mortgage is not reduced by paying interest. Mortgage interest is the principal source of profit for the lender on your loan. The lender may also get origination fees and discount points, which are paid in order to obtain a lower mortgage rate. Mortgages are amortized, which means that you pay down the principal with each payment until the loan is paid off completely at the end of the period. The majority of the monthly payment is first applied to interest, with only a tiny part applied to principle. As the amortization term progresses, a bigger share of the monthly payment is paid to the principal, with a lesser portion going toward interest.A Monthly Principal and Interest Payment
Assume you borrowed $200,000 at 5% interest for 30 years. The first principal and interest payment would be $1,073.64, with $833.33 going to interest and $240.31 going to the principal. If you have a fixed-rate mortgage, which has the same interest rate for the whole loan period, you will pay a little less in interest and a little more in principal each month, but your overall payment will remain the same. A monthly mortgage payment calculator will help you determine your principal and interest. You may also compute it yourself using two formulas: P = A / D D = {[(1 + i)^n] - 1} / [i(1 + i)^n] In the first formula, P represents the monthly payment, and A represents the loan amount. D is the discount factor in both formulations. In the second calculation, I represent the periodic interest rate (the annual rate divided by 12, the number of payments in a year), and n represents the number of periodic payments or payments per year multiplied by the number of years. The caret before each n indicates that it is an exponent, which means you will be increasing what comes before it to the nth power. Using the above example, first determine that I is 0.00416667, or 0.05 (5%) divided by 12. Then compute n as 360 because you're multiplying 12 (the number of payments each year) by 30. (the number of years for the mortgage). When you plug those figures into the second formula, you get 186.281717. Divide the loan amount of $200,000 by 186.281717 to get a monthly payment of $1,073.64. To figure out what makes up the monthly total, multiply $200,000 by 0.05, which is $10,000. That is the amount of interest due in the first year. Divide the total by 12 to get the monthly interest payment of $833.33. Subtract $833.33 from the total principal and interest of $1,073.64 to get $240.31 of the principal. An adjustable-rate mortgage (ARM) likewise amortizes so that the loan is paid off at the end of the term, but the payments may vary depending on when and if the lender changes your interest rate.Taxes
Each county has its own tax system. The rate might fluctuate from year to year, and houses are occasionally evaluated upon selling, so don't expect the prior homeowner's tax payments to be the same for you. For information on your property taxes, contact your county assessor's office. The amount withheld by the lender when opening the tax account determines the date of your first tax payment following closing. You should expect to pay between two and six months in advance as part of your closing fees.Insurance
If you live in a condominium complex, the condominium association will often carry blanket insurance coverage for the complex's communal property. The outside of the building is frequently included in community property, which is paid for by your association dues. Because each condominium association is different, it is critical to confirm what is covered by the blanket insurance and what must be covered by your homeowner's policy. You should keep an insurance policy on the contents and interior of your unit, as well as any other goods not covered by the blanket policy, and your lender may require it. The condominium association dues can be paid alone or in conjunction with other HOA dues. If you are purchasing a single-family house, you must purchase a separate homeowner's insurance policy. Don't put off looking until the last minute, especially if you're buying an older home that some insurance companies will not insure. The first year of insurance coverage must be paid in full at closing, but you may arrange with your lender to pay for the following years of coverage via your mortgage payments.