Mortgage 101: Understanding PITI and What Goes Into Your Monthly Payments
What Is PITI?
PITI stands for Principal, Interest, Taxes, and Insurance—the key components of your monthly housing costs. Let’s break down what each element means:
- Principal: This is the portion of your payment that reduces the original amount you borrowed for your home. For instance, if you took out a $200,000 mortgage, the remaining balance of that $200,000 is the principal. Part of your monthly payment goes toward reducing this balance.
- Interest: This is the fee your lender charges for providing the loan. It’s expressed as an interest rate—a percentage applied to your loan balance. A portion of your payment covers the interest owed to your lender.
- Taxes: These are property taxes assessed by your local government. While not part of your direct mortgage payment, lenders often include these costs in your escrow account and factor them into your debt-to-income ratio.
- Insurance: This includes homeowners insurance to protect your property and possibly private mortgage insurance (PMI) if required by your lender. Like taxes, these are often escrowed and calculated as part of your yearly housing costs.
How Lenders Use PITI
When assessing your ability to repay a mortgage, lenders rely on your debt-to-income (DTI) ratio, which includes PITI. This ratio measures how much of your monthly income is used for housing expenses compared to other debts. A lower DTI indicates to lenders that you’re less likely to struggle with your payments.
Remember Other Monthly Expenses
While PITI covers your core housing costs, don’t forget about other essential expenses like utilities, repairs, and renovations. Budgeting for these ensures you’re prepared for the full scope of homeownership.
Thinking of Selling Your Home
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