PITI (Principal, Interest, Taxes, Insurance)
The following article will cover all aspects of PITI including: What is PITI, How does PITI work, and What are the key factors of PITI?
What is the definition of PITI?
Principal, interest, taxes, insurance (PITI) are the sum components of a mortgage payment. Specifically, they consist of the principal amount, loan interest, property tax, and the homeowners insurance and private mortgage insurance premiums.
PITI is typically quoted on a monthly basis and is compared to a borrower’s monthly gross income for computing the individual’s front-end and back-end ratios, which are used to approve mortgage loans. Generally, mortgage lenders prefer the PITI to be equal to or less than 28% of a borrower’s gross monthly income.
How does PITI work?
A portion of each mortgage payment is dedicated to repayment of the principal—the amount of the loan itself. So, on a $100,000 mortgage, the principal is $100,000. Loans are structured so the amount of principal repaid starts out low, and increases in subsequent years.
Real estate or property taxes are assessed by local governments and used to fund public services such as schools, police forces, and fire departments. Taxes are calculated on a per-year basis, but you can include them as part of your monthly mortgage repayments; the amount due is divided by the total number of mortgage payments in a given year. The lender collects the payments and holds them in escrow until the taxes are due.
What are the Key Factors of PITI?
Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage.
Generally, mortgage lenders prefer the PITI to be equal to or less than 28% of a borrower’s gross monthly income.
PITI is also included in calculating a borrower’s back-end ratio, the sum total of his monthly obligations against his gross income.
If you have any other questions regarding PITI contact the mortgage experts at 864-397-8500 or click Mortgage Rates Today!
Financial Consultant and Author