What is PITI?

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.

Calculating PITI

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

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

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.

Taxes

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.

Insurance

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.