PITI Explained: Principal, Interest, Taxes, Insurance
If you’ve begun looking at available homes on the market, chances are you have come across a weird little acronym, PITI. What does it mean? What does it stand for? Is it something you need to know before beginning your home-buying journey? Absolutely. PITI stands for Principal, Interest, Taxes and Insurance, and can determine the total cost of your home. Before you even being looking at available properties that you think are in your price range, it is vital to understand the importance of PITI and the bearing that this acronym has on the house you are able to comfortably afford.
The most important piece of the PITI puzzle is the principal, or the total amount of money you borrow from the lender when making your home purchase. The amount you borrow from the mortgage lender is the amount you obviously need to pay back, in monthly installments or in larger bulk amounts, before the end of the loan term. If you are able to afford a large down payment on the purchase of your home, the amount of the principal goes down accordingly. For example, being able to come to the closing table with $50,000 for a $250,000 home purchase lowers your principal by that amount, reducing the amount to be paid back to the lender to $200,000. It is essential to have a realistic view of how much you can afford to pay back to the lender before getting your head turned around by homes outside of your price range.
The amount of money that a lender charges you for the privilege of borrowing the money for your home is called interest. Interest is calculated as a percentage of the outstanding principal. For instance, if your interest rate is 4% on a home loan for $300,000, then $12,000 will be added to the total amount that needs to be paid back to the lender. At first, the largest part of your mortgage payments will go toward paying off the interest amount, but as time goes by, more and more of your mortgage payment will be applied to the principal instead. Interest rates can change is you have an adjustable-rate mortgage (ARM), or if you refinance your mortgage loan down the road.
You know the old saying: nothing is certain except death and taxes. This is certainly true of your mortgage loan. Part of your mortgage payment includes taxes for your community’s schools, roads, and other municipal services. Real estate taxes are a part of homeownership, and the tax you pay on your home can vary from area to area. Properties located in a more popular or desirable part of town are going to have higher real estate taxes associated with them, so be sure to check out the local tax rate of any areas you may be considering before making your home purchase.
All homeowners with a mortgage are required to carry a homeowner’s insurance policy to protect their investment. Homeowner’s insurance can be collected by your mortgage lender and paid out to the insurance company and can help protect your property against a variety of potential damage. Homes that have been purchased with less than a 20 percent down payment may also be required to carry private mortgage insurance, or PMI, so the lender is protected against default on the loan.
To calculate your total PITI, follow this handy formula to remember the order:
Entering your mortgage info into a mortgage calculator like this one can help you calculate your principal and interest. Then, to calculate your property taxes, divide the assessed value of your home by 100 and multiply by the tax rate. For instance, let’s say a $200,000 home in an area has a tax rate of 2.50. First, divide $200,000 by 100 ($2000) and then multiply by 2.50 to get $5,000 as your answer. To accurately calculate your insurance payments, divide your annual premium by 12. Then simply add principal and interest, property taxes and insurance together to come up with your PITI.
Bishop Real Estate Group is Roseville, California’s premier real estate agency. We have years of experience in all real estate matters, and are here to answer any questions you may have about PITI, including how to calculate PITI and how it affects an FHA mortgage. We want to help you get the best home for the amount you can afford.
Let us assist you with all of your real estate needs! Contact the experienced team at Bishop Real Estate Group today.