What Is Principal, Interest, Taxes, Insurance – PITI?

Gulshan Ansari G

Introduction

PITI is an acronym for principal, interest, taxes, and insurance—the sum components of a mortgage payment. PITI is also included in calculating a borrower’s back-end ratio, the sum total of his monthly obligations against his gross income.

PITI is an acronym for the principal, interest, taxes and insurance that make up the sum of a mortgage payment. Principal pays down the loan balance; interest is the cost of borrowing; taxes are the property taxes; and insurance includes homeowners insurance and mortgage insurance, if applicable.

PITI: All of the standard components of a mortgage payment. Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage.

Components of PITI

  1. Principal: The “principal” is the total amount that it would take to repay and close the mortgage.
  2. Interest: This is the fee you pay for borrowing money.
  3. Taxes: 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.
  4. Insurance: Insurance premiums can be paid with each mortgage installment and held in escrow until the bill is due. There are two types of insurance coverage that may be included: homeowners insurance, which protects the home and its contents from fire, theft, and other disasters; and private mortgage insurance (PMI), which is mandatory for people who buy a home with a down payment of less than 20% of the cost.

PITI’s Role in Mortgages

Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage. A lender will look at an applicant’s PITI to determine if they represent a good risk for a home loan. Buyers may tote up their PITI to decide if they can afford to purchase a particular home.

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