What is PITI?

PITI is an acronym in mortgage lending that stands for Principal, Interest, Taxes, and Insurance, the four components of a monthly mortgage payment.

A Longer Definition: PITI

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.

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.

Common Questions About PITI

What happens to the “Taxes and Insurance” components of PITI?

The taxes and insurance portions are often placed in an escrow account by the lender and paid out when due. Escrow accounts ensure that property taxes and insurance premiums are paid on time.

Can PITI change over time?

Yes, PITI can change because property tax bills and insurance premiums adjust annually. PITI also changes for home buyers with adjustable-rate mortgages after the initial teaser period ends.

Does PITI include utilities and maintenance costs?

No, PITI only includes principal, interest, taxes, homeowners insurance, and possibly mortgage insurance. Utilities and maintenance are separate homeownership costs.

Can I choose my own insurance provider for the insurance component of PITI?

Yes, as a homeowner, you generally have the freedom to choose your own insurance provider for the insurance component of PITI. However, the lender may have specific coverage requirements for the policy.

Is it possible for the principal amount in PITI to increase?

No, the principal amount in PITI does not increase. Over time, as payments are made to the lender, the principal amount decreases. An increase in the principal would only occur if an additional loan is taken out on the property, such as a home equity loan.