PITI stands for principal, interest, taxes and insurance, which are the expenses that make up the majority of your monthly mortgage payment. During the lending process, your lender will use PITI as a way to judge if a home is in your price range because it’s a more accurate representation of a home’s true cost than the home price. Most lenders prefer the PITI amount to be less than 28% of your gross monthly income.
Each component of PITI is calculated separately and added together to get a total amount — the true cost of your new home. Depending on how your mortgage is set up, your monthly mortgage payment may or may not include payments to an escrow account for your property taxes and insurance. In those cases, you’ll pay a lump sum at the end of the year and the “T” and “I” of PITI will not factor into your monthly payment amount.
Many homeowners find it easier to just contribute to an escrow account and have the mortgage company pay these bills out of the escrow account on their behalf.
Here’s how each part of PITI is determined:
Principal refers to the lump sum amount you borrow from a lender to cover the cost of the home. For example, if you bought a home for $250,000 and put down 20%, your principal is $200,000. How much you pay in principal per month depends on the terms of your loan and how long you’ve been paying for your mortgage.
During the first few months of a mortgage, you won’t pay down your principal very much. But, over time, it will start to go down. Your amortization schedule will tell you exactly how much of your monthly payment will go toward the principal.
Interest rates vary by lender, and the higher a rate, the higher your monthly payment. Your interest rate is basically how much you have to pay a lender in order to borrow the money for your mortgage. At the start of your loan, most of your monthly payment will go toward paying for your interest. For a $250,000 home with a 4% interest rate, you will pay $10,000 in interest the first year. As your principal decreases, so will the amount you pay in interest.
You’ll have to pay taxes on your home, the most expensive of which is property tax. Taxes are calculated per year by your local government. Your lender will likely keep this money in an escrow account as you pay it monthly and then use it to pay off the total amount in taxes at the end of the year. Because of this, you may have to pay the difference if you haven’t saved enough.
In some cases, you might receive a refund if you put more than you need in the escrow account. Most lenders say that you should expect to spend about $1 for every $1,000 of your home’s total cost every month. So for a $250,000 house, this would be $250 per month, which adds up to $3,000 at the end of the year.
Most mortgage lenders require that you have some sort of homeowner’s insurance in order to qualify for a loan with them. If you did not put down 20% on your home when you bought it, you’ll typically have to pay for private mortgage insurance (PMI), too. Once you reach 20% equity in your home, you won’t have to pay for this anymore.
Like taxes, your insurance will be paid at the end of the year, but your lender will likely hold it in an escrow account for you as you pay monthly. Rocket Mortgage says you should expect to pay $3.50 for every $1,000 of your home’s total cost every month for insurance. For our $250,000 house, this would equal $73 per month.
PITI and Mortgage FAQ
- What is the 28% rule?
- The 28% rule is a financial calculation used by many mortgage lenders. The rule states that a household shouldn’t spend more than 28% of its gross monthly income on housing expenses like mortgage or rent. Lenders use this rule as a guide for whether they think a potential homebuyer can, or should, buy a specific home. If you bring home $3,000 each month, your recommended monthly home payment would be $840 or less using this rule.
- How does PITI affect qualifying for a mortgage?
- PITI is the most accurate way to see if a buyer can afford a certain home. Most lenders stick pretty close to the 28% rule, preferring that buyers either hit that percentage or less. A lender will use your gross monthly income and your debt-to-income ratio to understand where your money goes each month and how much you have left for PITI.
- Is mortgage escrow required?
- It depends on your loan program. Government-backed loans, like FHA loans, require mortgage escrow. Private lenders can decide if they want to require it for their mortgages.
- Is PMI included in PITI?
- Yes, if you don’t pay at least 20% for your down payment. If you pay less than 20% of your home’s total cost for your down payment, you will have to pay for PMI as part of your PITI until you have at least 20% equity in your home.
- Is HOA included in PITI?
- Not technically. But if your home requires an HOA, your lender will add it to your monthly calculations so that you understand the overall monthly cost.
- Does PITI include homeowners insurance?
- Yes. Most lenders require a buyer to purchase homeowner’s insurance and include it in the PITI.
- How can I avoid escrow on my mortgage?
- Some lenders will waive escrow if you pay at least 20% for your down payment. Most require it, however, and it usually benefits the buyer.
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