You only make one mortgage payment each month, but behind the scenes your loan servicer divides your single payment up into several different types of payments. These separate payments are collectively known as PITI, sometimes pronounced by each letter (P-I-T-I) or as one word (sounding like pity).
PITI is an acronym used in the mortgage industry to describe the components of your mortgage payment — Principal, Interest, Taxes and Insurance.
The PITI amount is important because your lender will use your estimated PITI mortgage payment to calculate your debt-to-income (DTI) ratio, or the percentage of your gross monthly income you use each month to cover the cost of auto loans, credit cards, student loans and other recurring debt. In most cases, if your DTI ratio exceeds 43%, it can be harder to get approved for a mortgage.
Below is a breakdown of what you’re typically paying for when you pay your mortgage.
The “P,” or principal, is the amount you’ve borrowed from your lender. During the first years you are paying your mortgage, very little of your monthly payment goes toward reducing principal (and more is going to pay the interest on the loan). That changes over time depending on the term (e.g., 15 or 30 years).
You should have received an amortization schedule at your loan closing that shows every mortgage payment you’ll make broken out into principal and interest amounts. If you didn’t get your amortization schedule at the closing, ask your loan servicer to generate it for you, or use the one on our Conventional Mortgage Payment Calculator or VA Mortgage Payments Calculator.
The first “I” represents the interest you’re paying to borrow money from the lender. As mentioned, in the beginning of your payment schedule, a majority of each payment goes toward interest. That amount will decrease over time, and more money will go toward your principal. That’s why your mortgage interest rate is so important. The higher your interest rate, the more you’ll pay for your mortgage over time. Let’s say you buy a $300,000 home with $20,000 down and take out a 30-year loan for $280,000 at a fixed interest rate of 3.5%. At the end of 30 years, you will have paid more than $453,636, based on an estimated monthly payment of $1,214. However, for the same amount and down payment, at an interest rate of 3.0% you’ll only pay $424,977, based on an estimated monthly payment of $1,180.
Property taxes are the “T.” While they are billed annually by your city or county, your mortgage company will divide that amount into 12 installments and collect it as part of your monthly mortgage payment. The loan servicer will typically save this money in an escrow account and withdraw it for payment when your property tax bills are due.
You’ll want to watch your account statements to be sure your property tax bills are being paid by the servicer.
The last “I” is what’s paid by your mortgage company for your homeowners insurance (and mortgage insurance, if applicable). Homeowners insurance protects your home and property in the event of damage or theft. Depending on the property and location, you may need to purchase additional protection, such as earthquake or flood coverage.
As with property taxes, your servicer divides your annual home and mortgage insurance premiums by 12, adds them to your monthly payments, and holds them in escrow until they’re due at which point they pay the bills for you.
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