If you’re getting ready to buy a home, you might hear the term “PITI” from your real estate professional. You might also come across it in emails with your lender or read it in your mortgage paperwork.
So what is PITI? Simply put, it’s an acronym that describes the four key components of your monthly housing costs as a homeowner.
Specifically, PITI stands for: principal, interest, taxes and insurance.
Many people make the mistake of comparing the cost of their monthly rent and utilities with a monthly mortgage and interest payment. In this kind of flawed comparison, owning a home can often seem like the better deal.
However, as evidenced by PITI, there is more to owning a home than paying a mortgage plus interest. Not even addressing utilities, you also have to factor in property taxes and insurance, which can definitely increase your monthly payments.
That’s why it’s important to use a PITI loan calculator, like this one from our parent company LendingTree, and speak to your lender to find out what your actual PITI payments will be. Only then will you have a comprehensive idea of the true cost of homeownership.
To help you get there, we’ll go into more detail below about each of these four components of a mortgage and what to consider before you buy a home.
Your home’s principal is the base amount of money you borrowed to buy it. So, if you financed $200,000 for a home, you have $200,000 of principal left to pay off.
It’s very important to note that your entire mortgage payment will not be applied to your principal balance. Only a portion of it will. The rest of your mortgage payment will go toward interest, taxes and insurance. If you want to pay down your mortgage faster, you’ll have to send in extra payments and instruct your mortgage company to apply that cash to the principal, not toward future interest.
Interest is the cost you pay for taking out a loan. The bank charges you for lending you money in the form of interest. After all, if it lends you X dollars, that’s X dollars it can’t use itself. So there is a cost associated with lending. You’ll normally see interest in percentage form. (The interest rate on this loan is 4 percent.)
Still, it can be difficult to understand how to calculate your interest rate and how that affects your mortgage payment. Here are some of the ways to determine your interest costs:
- Use a PITI loan calculator like this one from our parent company, LendingTree.
- Use an Excel-style spreadsheet to calculate your interest over the course of your loan
- Calculate it yourself using this formula: Interest = Principal x interest rate x number of months.
There is also a difference between your mortgage interest rate and your APR. According to the Consumer Financial Protection Bureau, your APR (annual percentage rate) includes your mortgage interest and other charges like fees. So be sure to ask your lender to see your APR so you can get a sense of the total cost of your mortgage. Knowing APR is also a good tool to use to properly compare lenders, because some lenders charge higher fees than others even if they’re offering the same loan amount.
Lastly, your interest payment will not be the same every month. This is called amortization, the gradual reduction of a debt by regular scheduled payments of interest and principal. Many first-time homeowners are surprised at how much of their mortgage payment goes toward interest and not principal. In order to plan ahead, ask your lender for a sample amortization schedule so you can get an idea of how much of your monthly payments will go toward interest and how much will apply to principal over time. As you pay down your interest costs, you’ll start to see the principal balance reduce more and more.
As a homeowner, you pay property taxes on your home. These funds are used to fund your local communities, including your local public schools, fire departments, police forces, libraries and more.
Here is some information on property taxes and how your city determines them:
- Property taxes vary from one state to the next.
- A local tax assessor will determine your local property tax, but has no control over your state tax rate. You can also look up how to calculate property taxes to find out more information about your own home.
- You can check your property tax assessment every year to make sure there are no errors on it. In some areas, you’ll have an updated assessment every year, but in others, it could be every few years.
- There are many factors that impact your property tax rate. Some of these factors include improvements to your property, the price of similar homes in your area, and even things not related to your home, like state and local budget cuts.
Luckily, the property taxes you pay are often an income tax deduction, so that is one benefit to homeownership.
The amount of insurance you pay as a homeowner really depends on where you live, how much of a down payment you gave your lender, and what type of coverage you want or need. Below are three examples of common types of insurance that homeowners carry:
- Homeowners insurance: Homeowners insurance typically protects your home against damage caused by things like a house fire. Most homebuyers put their insurance payments in an escrow account ahead of time. Then, your bank uses the funds you put in the account to pay the insurance on your behalf.
- Flood insurance: Not all homeowners buy flood insurance. This will really depend on where your home is, and whether there’s a risk of flooding from hurricanes or being in a low-lying area. It's important to do your research and get a flood certificate to find out if the property is located on a floodplain.
- Private mortgage insurance: If you can’t put 20 percent down on your house, some banks (but not all) will require you to pay for private mortgage insurance, also known as PMI. Some types of mortgages, like FHA loans, require such insurance.
What is not included in PITI payments?
Although PITI is comprehensive when considering how much it will cost you to own and operate your home, there are some other costs that aren’t factored in.
Below are some examples.
- Utilities: Your utilities might include electricity, natural gas, water, trash collection and the like.
- Recurring subscriptions: Have you factored in things like cable, phone, internet, Netflix, etc.
- Homeowners association fees: If you live in a condo or in a neighborhood that shares the costs associated with common spaces or services, you might have to pay an HOA fee on top of your PITI costs.
- Home improvements: If you want to upgrade some part of your home, this will be an added cost.
- Home maintenance costs: You can predict basic home maintenance costs, like cutting the grass or fixing a leaky faucet. You can’t predict some of the larger expenses, like those arising from termite damage or a broken hot water heater.This is why it’s important to have an emergency fund before buying a home.
Ryan Inman, a Las Vegas based financial adviser, often works with young families and potential homeowners. He says it’s important to pay attention to the non-PITI costs mentioned above. “My best advice to first-time homebuyers is to compare the amount of rent and utilities you are paying now with how much PITI, HOA fees and utilities will be on a home,” he tells MagnifyMoney.
“Save the difference for three to six months, and see how your lifestyle is affected.
The key to Inman’s strategy is figuring out if you can maintain a comfortable lifestyle (no dramatic changes or sacrifices) on your mock homeowner’s budget. If it’s no problem, then you might be ready for homeownership.
“Also, factor in that you will now be responsible for maintaining the home,” he adds. “There is no rule for how much this can be,” since it really depends on the age and quality of the home, “but it could be costly.”
When you get your results using the PITI payment calculator, don’t forget to add in the uncounted items mentioned above, like home maintenance costs and utilities.
It’s also important to have a cash buffer for unexpected emergencies so you don’t go into debt fixing a flooded basement or addressing significant damage from a storm.
If you do all of this, you’ll have an excellent idea of what your cost of homeownership will be. If you feel comfortable with this cost and are convinced you’re set to handle anything unexpected that might pop up, then you’re well on your way to becoming an owner.