What is PITI?

If you’re buying a home for the first time, you’ll likely come across the terms “principal” and “interest” when referring to a mortgage. These are common terms that describe what you’re borrowing and how much it’ll cost you, but there are other costs in addition to these that make up your whole mortgage payment. Together, these costs are known as “PITI.”

What does PITI mean?

PITI stands for principal, interest, taxes and insurance, all of which make up your monthly mortgage payment.

Principal

The principal on your mortgage is the amount you borrow from a lender to finance a home purchase. Let’s say you’re buying a $400,000 home and you have 20 percent for a down payment, or $80,000. To finance the remaining $320,000 of the home’s price, you secure a 30-year fixed-rate mortgage. The principal, in this case, would be $320,000.

Interest

Mortgages come with interest, which is the amount the lender charges you to loan you money. Your interest rate determines this added cost.

Following the example above, say you put 20 percent down on a home costing $400,000, and you get a 30-year fixed-rate mortgage to finance the remaining $320,000 at 6.6 percent interest. At that rate, your monthly payment would come to about $2,043 (excluding homeowners insurance and property taxes). If your rate was 7.0 percent, you’d pay slightly more, about $2,128, per month.

At first, more of your monthly mortgage payment covers the cost of the interest, but as you continue to repay the loan, more of that payment tackles the principal. Mortgages tend to be structured this way because it’s less risky for the lender.

A mortgage is an amortizing loan, meaning you’ll repay the loan in installments over time. You can use Bankrate’s amortization calculator to see how your monthly payments change over your loan term. You can also see how much goes to the principal and how much goes to interest at different points in your repayment period.

Taxes

The taxes you pay for in your monthly mortgage payment are property taxes, which are determined by the assessed value of your home or other homes in your tax jurisdiction. Typically, your lender collects these taxes for you through your mortgage payment, holds them in an escrow account and pays them on your behalf when they come due.

Insurance

Lenders require you to purchase homeowners insurance to obtain a mortgage. Insurance provides coverage for you in the event your home is damaged and also serves to protect the asset — your home — that your lender is using as collateral to secure your mortgage.

Your insurance premium is typically included in your monthly mortgage payment. Like your property taxes, your lender will hold the premiums in escrow and pay them to your insurance company for you.

How to calculate your PITI payment

You can compute your PITI payment by following these four steps:

1. Determine your principal and interest

The principal and interest will make up the largest portions of your mortgage payment. Let’s use our example from above: a $320,000 mortgage at 6.6 percent interest, resulting in about $2,043 a month.

2. Research and add property taxes

The best way to account for property taxes is to research with your state or local government. Many states, counties and municipalities have property tax records and estimators you can use to understand how much property tax you’ll pay. To have the most accurate estimate of your property taxes, contact the area’s tax assessor and request a past record.

However, you can estimate your monthly property taxes by dividing your property’s value by 1,000. So, for a $400,000 house, that’s $400.

3. Estimate homeowners insurance cost

The average annual homeowners insurance premium for $250,000 in dwelling coverage stands at $1,687, or $141 a month. However, insurance can vary considerably depending on your home’s value, its location and the amount of coverage you purchase.

To get an accurate estimate, get a few quotes for homeowners insurance from different companies. Along with using these quotes to understand how much you’ll pay, you can use them to help you decide on a provider.

For the sake of our example, we’ll use $245 a month as our estimate, which is the average for $400,000 in dwelling coverage, according to Insurance.com.

4. Add totals together

Once you have each estimated element of PITI, add them together to get your total monthly payment. For our example, this equates to:

$2,043 (principal and interest) + $400 (property taxes) + $245 (homeowners insurance) = $2,688 (total monthly PITI payment)

For further assistance in calculating your mortgage payment, use Bankrate’s mortgage calculator.

What is not included in PITI?

Not all costs associated with a mortgage are automatically factored into PITI. These include:

• Mortgage insurance premiums: These premiums apply to most conventional loans with a down payment under 20 percent and all FHA loans.
• HOA fees: You’ll pay these fees if you buy a property in a homeowners association. However, the amount you’re assessed varies by community.
• Closing costs: These costs aren’t included in the calculation unless you financed them with your loan as a no-closing-cost mortgage. In this case, they’d be included in the principal and interest portion of your payment.

Why is PITI important?

Aside from looking at your credit score, lenders account for PITI and your other debt obligations to calculate your debt-to-income (DTI) ratio, which helps them determine whether you’ll be able to repay the loan based on your financial situation. The DTI ratio is the amount of debt you owe on a monthly basis, including the PITI payment, divided by your monthly income.

The ideal DTI ratio for lenders is 36 percent or less, but many accept up to 43 percent or even higher.

Frequently asked questions about PITI

• What is the maximum PITI?

  Maximum PITI limits your monthly mortgage payment to what you can afford. If your lender requires a DTI ratio of no more than 36 percent, for example, your maximum PITI would be your gross income multiplied by 0.36, minus all other debt payments. If your income totals $7,500 a month, say, and you also pay $230 toward student loans, your maximum PITI would be $2,470.

• Can you lower your PITI?

  You can lower your PITI in several ways. The mortgage principal and interest will make up the largest portion of your payment, so get the lowest loan rate possible by improving or maintaining a strong credit score and shopping around with at least three mortgage lenders. If you can make a bigger down payment, that’ll help lower your PITI, too, because you won’t need to borrow as much.

  You can also comparison-shop for homeowners insurance. While you won’t have much say over your property tax bill, you can keep your taxes low overall by buying a cheaper home, or a home in an area with lower taxes.

• How does PITI change over time?

  As you pay down your fixed-rate mortgage, your monthly payment will stay the same over the life of the loan since your interest rate stays constant. If you have an adjustable-rate mortgage (ARM), you can expect the monthly principal and interest to change after the set introductory fixed-rate period since the rate is variable. This means you could end up with a much higher monthly mortgage payment than what you started with. Property tax and homeowners insurance bills may also increase or decrease over time, impacting your PITI.

• How does PITI affect a borrower’s mortgage preapproval amount?

  Lenders use PITI when deciding how much home you can afford. Most cap your budget at 36 percent of your gross monthly income, minus other monthly debt obligations, including PITI. This is referred to as your debt-to-income ratio. A lower PITI can keep your DTI at or below the lender’s threshold and prevent you from being denied a mortgage.