What is PITI?
PITI stands for principal, interest, taxes and insurance, all of which make up your mortgage payment. Learn why it’s important and how to calculate.
Sara Coleman
While most insurance is designed to protect your finances, mortgage insurance acts as a safety net for the lender. If the homeowner defaults on their mortgage, this insurance kicks in to cover the losses. Typically, mortgage insurance is required when a buyer is unable to make a down payment of at least 20% of the property's purchase price on a conventional loan or if they are buying using a government-backed mortgage, like an FHA loan.
Here’s what you need to know about mortgage insurance before you buy your first home.
Private mortgage insurance (PMI) policies protect lenders from losing money through foreclosures and defaults. Policies are issued to banks and other financial institutions in the United States. In most cases, lenders require it when financing a client who is considered somewhat “risky.”
PMI is calculated based on your interest rate, loan-to-value (LTV) ratio, loan term, credit score and other risk factors. This amount is added to the overall expenses that make up your mortgage payments, or PITI (principal, interest, taxes and insurance).
Payments are due in monthly installments, usually until the borrower has gained 20% or more equity. PMI could also fall off once the balance of your loan hits 78% LTV based on the original appraisal or if the borrower is halfway through the life of their loan.
Lenders recalculate premiums annually, so you might see your costs go down each year as you continue to pay off the loan.
» MORE: How to get rid of PMI
PMI and mortgage insurance premiums (MIP) are two types of mortgage insurance that homeowners may be required to pay, but they apply to different types of loans and have different rules.
PMI applies to conventional loans — meaning those backed by private entities and not the government. PMI is typically required when a homeowner puts down less than 20% of the home's purchase price. The cost of PMI can vary but is usually between 0.5% and 1% of the loan amount annually.
“Most consumers are not aware that when your equity builds, you can remove your mortgage insurance without refinancing your home,” said Michelle Taylor, a loan originator with the lender Gold Financial Services. “You can call your current lender to get instructions on how to remove the mortgage insurance."
Borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI) are two different ways of paying for PMI.
» COMPARE: Best mortgage lenders
MIP is required on all FHA loans, regardless of the down payment amount. The cost of MIP can vary based on the loan amount and term, but it typically includes an upfront premium of 1.75%, plus an annual premium ranging from 0.45% to 1.05%. Unlike PMI, MIP cannot be removed from an FHA loan unless you refinance into a conventional loan.
While MIP is an ongoing annual charge, you will also pay an upfront mortgage insurance premium (UMIP), a one-time charge that you pay at closing.
» COMPARE: Best FHA loan lenders
If you are wondering if USDA or VA loans require mortgage insurance, the answer is: sort of. Both loan types charge fees that act similarly to mortgage insurance.
USDA loans, while not requiring traditional PMI, do have an upfront guarantee fee and an annual fee. The upfront guarantee fee is equal to 1% of the loan amount, and the annual fee is 0.35% of the loan balance.
» COMPARE: Best USDA lenders
VA loans require a funding fee, which can range from 1.4% to 3.6% of the loan amount, depending on factors like the borrower's military service details, down payment and whether it's the borrower's first time using a VA loan.
Not everyone has to pay this fee. Some veterans and spouses are exempt, such as those receiving VA compensation for a service-connected disability.
» COMPARE: Best VA loan lenders
Mortgage insurance protects the lender, not the borrower. Borrowers need to be aware that it’s not the other way around. For example, it does not cover the borrower if their house is destroyed by a disaster — that’s what homeowners insurance is for.
It is crucial to have a homeowners insurance policy in place before you close on your home. Remember, even though you might be required to pay mortgage insurance, it does not benefit you, and you should remove it when possible to save money.
» MORE: What is title insurance?
You can get a rough idea of how much your mortgage insurance would cost with the following calculations. Keep in mind that some loan types might have upfront mortgage fees to consider, too.
For FHA loans, MIP lasts for 11 years or the life of the loan, depending on when you took your mortgage out. For PMI, you can request the servicer cancel it when your loan balance reaches 80% of the original home value. The servicer must automatically cancel PMI once the loan balance falls to 78% of the original home value. It must also cancel PMI once you’re halfway through your loan term.
The cost varies depending on the type of loan, the amount of the down payment, and the borrower's credit score. It typically ranges from 0.2% to 2.25% of the original loan amount per year.
Yes, a borrower's yearly premiums get recalculated on an annual basis based on the size of your loan. As the principal balance decreases, so does PMI.
Mortgage insurance lowers risk to lenders, which encourages them to approve borrowers who might not otherwise qualify. Its requirements vary by loan type, but you can generally expect to pay this insurance if your down payment is less than 20% of the home's purchase price for a conventional loan.
While paying mortgage insurance is not ideal, you can cancel your PMI or refinance your loan type later.
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