What Is PITI?

What does PITI mean?

PITI is a combination of four different components: principal, interest, taxes and insurance. Here is a breakdown of PITI and what each of these components means for your monthly payment:

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 the rate, the higher your monthly payment is. 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% annual percentage rate (APR), you will pay $10,000 in interest the first year. As your principal decreases, so will the amount you pay in interest.

Taxes

Paying taxes on your home is nonnegotiable. Your local government calculates your property tax each year, which means this number might fluctuate annually.

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 a homeowners insurance policy in place before finalizing the mortgage. Homeowners insurance covers damage or replacement to your home due to a covered peril (such as fire, hail or theft).

If you did not put down 20% on your home when you bought it, you’ll also typically have to pay for private mortgage insurance (PMI). This insurance is to protect the lender in case you default on the loan. Once you reach 20% equity in your home, you don’t have to pay for PMI any longer.

Like taxes, your insurance gets paid at the end of the year, but your lender will likely hold it in an escrow account. 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.

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.

Why PITI matters for mortgage qualification

Calculating the PITI is an essential part of the lending process because it provides you with a more accurate estimate of your monthly mortgage obligation. Lenders also use PITI when calculating how much of a payment you can take on based on your monthly gross income.

The 28% rule

A rule of thumb for many mortgage lenders is 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.

PITI is the most accurate way to see if you can afford a certain home. Most lenders stick pretty close to the 28% rule, preferring that buyers either hit this percentage or less. A lender uses your gross monthly income and debt-to-income ratio (DTI) to understand where your money goes each month and how much you have left for PITI.

“The 28% / 36% debt-to-income rule also serves as a reminder that savings for everything — from home repair to retirement — need to be provided for on a consistent basis from the portion of your income not associated with housing costs,” explained Thomas Booker, chief strategy officer at Candor Technologies, which provides automated mortgage underwriting services. “In my opinion, this is a good way for a borrower to gauge their long-term ability to carry housing and other debt.”

» MORE: What is a good debt-to-income ratio for a mortgage?

How to calculate PITI

You calculate each component of PITI separately and add them together to get a total amount — this is the true cost of your monthly mortgage payment.

When you apply for a mortgage, the lender will provide you with a loan estimate. This document outlines the estimated monthly payment, including the principal, interest, taxes and insurance. It also includes other loan-related costs, so you have a full view of your financial obligations.

Even if you’ve not yet applied for a mortgage, you can still estimate your future PITI:

• Principal (P) – Consider how much you can reasonably put down on a home. You may be able to put down as little as 3% on some conventional loans or even 0% down if you qualify for a VA or USDA loan.
• Interest (I) – Compare the APRs of different mortgage lenders to see what your annual interest payment might be on the sale price of a home you’re eyeing.
• Tax (T) – Research the property tax rates in the specific area where you're planning to buy. You can likely find property tax information on the local government's website or ask a real estate agent.
• Insurance (I) – For homeowners insurance, you can request quotes from insurance providers or work with an insurance agent for an estimate based on the property's location and other factors.

There are numerous online mortgage calculators allowing you to input the loan amount, interest rate, loan term, property taxes and insurance costs. These calculators can show you the monthly PITI payment.

» MORE: What is the average down payment on a house?

PITI calculation example

Let’s see what PITI looks like for a hypothetical household, so you can see the importance of using PITI versus only calculating principal and interest.

• Property price: $450,000
• Down payment: 20% ($90,000)
• Loan amount: $360,000 ($450,000 - $90,000)
• Interest rate: 6.5% (fixed-rate mortgage)
• Loan term: 30 years
• Property tax rate: 1.0% of the property price annually, or $4,500
• Annual homeowners insurance premium: $1,800

With this example, the monthly charges include principal (P) and interest (I) at $2,275, taxes (T) of $375 per month and insurance premiums (I) of $150 per month.

Added together, this brings the total monthly PITI payment to $2,800.

Note this calculation does not include any additional costs like homeowners association fees or other possible escrow requirements, which need factoring in if applicable. Additionally, this is a simplified example, and actual mortgage rates and insurance costs may vary based on market conditions and individual factors.

» MORE: How to lower your monthly mortgage payment

What’s not included in PITI?

While principal, interest, taxes and insurance are big numbers, they don’t encompass the other costs of homeownership.

“PITI is not a true statement of the cost of homeownership in most places but is an indication of the larger expenses directly associated with the property,” said Booker.

Keep these non-PITI potential costs in mind, and factor them into your overall monthly budget if necessary.

• Homeowners association (HOA) dues: If you live within a community governed by a homeowners association, you may have to pay additional fees or regular dues for maintenance, amenities and communal services.
• Homeowners insurance deductibles: While PITI includes homeowners insurance, any deductibles (out-of-pocket costs if you file a claim) are not factored into the PITI calculation.
• Home maintenance and improvement costs: PITI only covers the regular mortgage payment and not the funds for general home maintenance, repairs or improvements. As a homeowner, it’s best to budget separately for these expenses.
• Utilities: PITI doesn’t include costs for utilities such as electricity, gas, water and internet.
• Special assessments: In some cases, local governments may impose special assessments on properties for infrastructure improvements like road repairs or new sewer systems, which aren’t included in the tax portion of PITI.
• Property management fees: If you're not living in the property and have a property management company overseeing it, then these are separate expenses on top of PITI.
• Additional escrow payments: While PITI includes escrow payments for taxes and insurance, certain mortgages might require additional escrow payments for other purposes, such as special insurance requirements or future tax increases, which aren’t factored into your monthly PITI installments.

“The biggest surprises are assessments for school taxes that may not be included or sanitation district fees — for [trash] collection, for example,” said Booker. “Additional assessments also come with owning the property in certain areas and can be almost as much as the property taxes in some cases, so ask your loan officer about these additional expenses.”

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