In the real estate business, we’re as bad at tossing around acronyms as they are in the military! There are ARMs and CMAs, MLS and FSBOs. Since I’ve recently been focused on the various types of mortgages, let’s stick to that theme and talk about the acronym “PITI.”
What Does PITI Stand For?
PITI stands for principal, interest, taxes and insurance. So why are they all lumped together like that, and what does one have to do with the other? PITI represents all the components of a mortgage payment. Let’s break this acronym down even further.
While this may initially make you feel like you are back in grade school, in real estate terms, the principal is the actual amount of your loan. Each month, you pay a portion of the loan off in the form of the principal. In early borrowing months, the principal will be fairly small. As you own your home longer, you’ll see that you begin to pay more and more of the principal each month. If you have an interest-only loan, then this would not apply to you.
The interest you pay each month is the amount the lender is charging you to borrow the money. It’s a percentage of the principal and the amount you signed for when you purchased your home. I told you the principal wasn’t the bulk of your payment in the early months, so you can guess what is. Yep, the interest. But converse to what I said above, this portion of your payment will go down as the years pass, while your principal portion goes up! For fixed-rate mortgages, your interest rate stays the same, but if you have any type of adjustable-rate mortgage, remember, this amount could fluctuate.
You know Uncle Sam is going to get his cut! Each month you’ll pay real estate taxes as part of your mortgage payment if you have a PITI-type mortgage payment. You pay your lender, and they pay the money on to your local municipality. Taxes can vary greatly based on your area, so do your research to know your tax rate. Paying monthly avoids owing a large sum at once.
The last piece of a PITI mortgage payment is the homeowners insurance. Many people choose to have the lender collect their payments as part of their escrow account and have the lender pay the insurance bill. This avoids you owing hundreds for insurance all at once. Remember, insurance covers your home in the event of fire or other damage. Also, if you put down less than 20 percent of your loan value, you may have to pay what’s called private mortgage insurance. This insurance protects the lender from default.
And now, you are an expert on PITI! If you have more questions about terminology, process or about starting your home search, contact me! I would love to start building a relationship and help you with your next real estate venture. And remember, when you list with me, I stage your home for free when we use your furniture. One less thing to put on your list!