What is PITI?

PITI: Explained in Plain English

PITI (pronounced "PEE-eye-TEE-eye") is a mortgage acronym often used to describe a home buyer's total monthly housing payment. It is expressed in dollar terms and is comprised of four parts.

1. Principal

The principal is the portion of the monthly mortgage payment that goes towards paying down the principal balance of the loan.

2. Interest

The interest is the portion of the monthly mortgage payment that is the cost of borrowing money. Interest payments decrease each month as the principal balance is paid down.

3. Taxes

The "taxes" in PITI refer to "property taxes," which are fees charged by the governing municipality for services such as police and fire departments, schools, roadways, and parks.

Taxes may be paid monthly as part of the mortgage payment or semi-annually, quarterly, or directly to the local government depending on the location.

4. Insurance

The insurance payment in PITI refers to homeowners insurance, which provides coverage for damage to the property and may also include other types of coverage, including personal liability insurance.

Like real estate taxes, insurance is included in PITI calculations even if the homeowner makes payments directly to the insurance company. Not all mortgage loans require escrow accounts for insurance, so the homeowner may pay the insurance company directly if the lender does not mandate escrow.

5. (Sometimes) Mortgage Insurance

In addition to these four components, PITI may include a fifth element: Mortgage Insurance.

Mortgage insurance applies to conventional mortgages, FHA loans, and USDA loans when the home buyer makes a downpayment that is less than twenty percent of the purchase price. Mortgage insurance is temporary for conventional loans.

PITI: A Real World Example

Imagine a first-time home buyer who wants to keep the monthly mortgage payment between 25% and 30% of their monthly income. Looking at different homes, they notice that each home's PITI varies because of differences in purchase prices, real estate tax bills, and homeowners insurance rates.

For example, one home with a high purchase price is in a neighborhood with surprisingly low property taxes, and the PITI is manageable. Meanwhile, the PITI of a more modestly priced home in a higher property tax neighborhood is about the same.

The first-time buyer learns to shop for homes based on all components of the monthly payment—principal, interest, taxes, and insurance—and ultimately purchases a home with a high purchase price but low tax and insurance rates.