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What does PITI mean, and how does it affect your mortgage?

Yahoo Personal Finance· Getty Images
Updated 5 min read

PITI is an acronym for principal, interest, taxes, and insurance. These are the four primary components of a monthly mortgage payment.

Here's how each of these four categories affects your mortgage payment.

Read more: First-time home buyer in 2024 — What you need to know

When buying a home, there are plenty of acronyms to unravel, including APR, PMI, DTI — and PITI.

Let's break down PITI:

The mortgage principal is the remaining balance of the amount you borrowed to buy a home. For example, if you purchase a $300,000 house and make a down payment of $30,000, your home loan would have a beginning principal balance of $270,000.

Each month you make a payment, a small slice of principal is paid down, and the rest goes toward interest. The amount allocated to the principal grows over the life of the loan.

The lender charges mortgage interest on your principal, based largely on your credit score. The $270,000 loan mentioned above, with a monthly payment of $1,796, would generate over $17,250 in interest paid to the lender in the first year of a 7% 30-year fixed-interest mortgage.

Only about $2,500 would be applied to principal reduction in that first year.

Monthly interest payments grow smaller, while principal payments increase over the loan term.

Dig deeper: 5 strategies to get the lowest mortgage rates

Property taxes are often included in your monthly payment. The taxes are estimated annually, and the one-twelfth amount you pay monthly is held in escrow (a financial holding account) until due.

The mortgage servicer, the firm that handles loan payments and third-party disbursements, will adjust your contributions to the escrow account for periodic changes in tax rates.

Homeowners insurance premiums may also be a part of your payment. Lenders usually require a homebuyer to buy insurance to protect the property used as collateral for a loan.

Like taxes, you pay a one-twelfth portion into the escrow account each month, and as the balance builds, the insurance premium is paid when due. This amount may also change periodically, as insurance costs can vary.

You also might have to pay for mortgage insurance, depending on your situation. If you make a down payment of less than 20% on a conventional loan, the lender will require private mortgage insurance. However, it doesn't protect you — PMI covers lender costs in case of a loan default. You can avoid paying PMI if you make a down payment of 20% or more.

Learn more: How to get rid of PMI

Other types of mortgages require mortgage insurance as well. For example, FHA loans always come with FHA mortgage insurance premiums (MIPs).

USDA loans also have mortgage insurance, though it's called a USDA guarantee fee.

Even VA-backed loans have a type of mortgage insurance called a VA funding fee. You usually pay it upfront, but you can choose to roll it into monthly payments instead.

PITI plays a big role in affordability and loan eligibility because it is more real-world related to what you'll pay monthly on a mortgage. Sure, principal and interest are the main components, but taxes and insurance (both homeowners insurance and mortgage insurance) are some smaller expenses that quickly add up when considering homeownership.

Here's an example: Let's use the $1,796 monthly payment we mentioned above on the $270,000 30-year mortgage. Add in taxes, homeowners insurance, and PMI (because you made less than a 20% down payment), and your monthly payment balloons to $2,336.

Some expenses aren't covered by your monthly mortgage payment but still need to be budgeted for. Homeowners’ association, or HOA, fees might be one. Other ongoing costs will include utilities, maintenance, and yard upkeep.

PITI also doesn't include mortgage closing costs.

Learn more: Closing on a house — What to expect and how to prepare

The best way to determine how much PITI will be included in your monthly payment is to use the free Yahoo Finance mortgage calculator. The calculator provides principal and interest amounts based on an estimated interest rate, down payment, and home purchase price.

Some calculators will also estimate property taxes and homeowners insurance, which may be in the ballpark but not completely accurate.

When you speak to a few mortgage lenders to find the best interest rate you can earn, they will include accurate estimates for taxes and insurance.

Yes, PITI can change. If you have an adjustable-rate mortgage rather than a fixed-rate loan, your principal and interest payments can certainly change. Also, as property taxes and insurance costs change, so will your PITI.

The 28% PITI rule is tied to another acronym: DTI. Your debt-to-income ratio is a significant factor in gaining lender approval for a loan — and an essential tool to knowing how much house you can afford.

The 28% rule refers to the percentage of your income that should go to a mortgage. It says PITI should be 28% or less of your monthly gross (before taxes and deductions) income. However, this is less of a rule and more of a guideline. Lenders have flexibility based on your credit score and down payment.

Looking at it from the opposite angle: Take your gross monthly pay and multiply it by 28%. That should be your target monthly mortgage payment, including PITI.

The best way to lower PITI is to make a larger down payment. Doing so reduces the principal you'll owe and the interest you'll pay.

You can also refinance your mortgage when interest rates fall below your current mortgage rate. That can lower your PITI. But be careful: if you refinance and extend the loan term, your payment may be lower, but you will likely end up paying more interest over the longer loan life than you would have with your original, higher-interest mortgage.