When you are buying a house, there will likely be many things you don’t know even if it isn’t your first time buying a house. Don’t let this discourage you. Just ask questions of your real estate agent so you can be sure you know what to expect. Early in the home buying process, you are likely to hear your mortgage lender and your real estate agent mention PITI. What in the world does this have to do with buying a house? PITI is an acronym for your mortgage payment that includes Principal, Interest, Taxes and Insurance. This is commonly referred to during the mortgage application process as your lender is determining your credit ratios and making sure your income and loan amounts fall within their underwriting guidelines.
When your mortgage lender is calculating your PITI, the yearly amount of money to cover taxes and insurance on your home are put into an escrow account and divided by twelve, then added to the principal and interest to make up your total mortgage payment. The “P” in the acronym refers to the principal of the mortgage. This is the total amount of money borrowed from the lender to make your monthly payments. With each payment made, a portion of the principal is paid off and there is a gradual decrease in the outstanding balance owed. Over the life of the mortgage, the principal component of each payment towards the outstanding balance starts out very small and gradually increases so you are paying more money toward the principal each month. As the principal payment amount slowly increases with each payment, the equity in your home increases.
The first “I” in PITI stands for interest and is a charge from the lender in order to borrow the money to purchase your home. Initially, the largest part of your mortgage payment will go towards the payment of interest. There are a variety of interest types yielding a variety of rates. Your lender will assist you in determining which interest type and rate is best for your needs.
Taxes “T” are the next section of the PITI acronym. These are property taxes that will be paid to the county and city where your property is located. First, the property is given a market value which is determined based on the assessed value of your home and paid into your mortgage’s escrow account each month so your lender can pay it when your taxes are due. The tax on market value can change based on any new property reassessments. However, major home improvements, such as home additions, will trigger a reassessment consequently increasing the tax levied dependent on the added market value.
The final “I” in PITI represents your homeowner’s insurance cost. This insurance is important to both the homeowner and the lender. As the homeowner, you are protecting your investment from fire and other disasters. The lender is utilizing the insurance to protect their investment of lending you the money. The insurance guarantees repayment of their loan should any disaster threaten their collateral. In the majority of cases, lenders require homeowners insurance to be carried as a condition of the mortgage. There are multiple carriers of homeowners insurance, thus shopping around for rates is highly recommended and in your best interests.
All of these items together total your PITI and will make up your mortgage payment each month. When you are applying for a mortgage, your lender will let you know this amount so you know what to anticipate your mortgage payment to be each month as you are putting together your household budget.
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