As you go through the mortgage process, you may encounter the acronym PITI in some of your documents. No, this does not mean your mortgage company is taking “pity” on you and giving you a discount. It is simply a term that includes all the components (principal, interest, taxes, and insurance) of your future mortgage payment. It is a helpful estimate that allows mortgage lenders to decide whether you qualify for a home loan. Here’s what each of the pieces mean:
PRINCIPALThis is the amount of money that you borrow from the lender to pay the seller or to pay off the original loan, in the case of a refinance. The principal does not include any interest the lender will charge. So, for example, if you buy a home for$300,000 with a 20% down payment ($60,000) then your loan principal would be $240,000. The seller would get both your down payment and the $240,000 from the bank.
INTERESTHowever, you will end up re-paying much more than the principal over the life of the loan thanks to your interest charges. This is the money the lender gets to keep for making you the mortgage loan. It is calculated as a percentage of the loan amount. Over the past two years, average rates on long-term mortgages have ranged between 2%-8%, although they have reached higher in previous decades. Let’s say you get a 6% interest rate on the $240,000 loan from above. You would essentially be paying an extra 6% of the balance each year. The first year, that would amount to roughly $14,400, but the number would decline slightly each year as the principal decreases.
There are different loan types like adjustable rate mortgages (ARMs) that allow you to pay a minimal amount of interest for the first few years, after which the rate is allowed to adjust based on market trends. Give us a call today to discuss whether a fixed-rate or adjustable-rate loan makes the most sense for your situation.
TAXESAll states in the U.S. charge taxes on homeowners and they can vary widely from state to state and county to county. These property taxes are used by local governments to pay for things like emergency services, public schools and libraries, road and park maintenance, and community development projects. We can look up local tax rates to give you a good idea of how much you’ll pay each year and month. Your property value will be periodically assessed by your local government, and the amount of taxes could increase based on market conditions.
INSURANCEFinally, your monthly mortgage bill will include part of your yearly homeowner's insurance premium. Homeowners insurance provides you with financial compensation if your property is damaged by things like fire or pipes bursting, and it reimburses you if your home is burglarized. Most mortgage lenders require homeowners to have an active insurance policy, as it protects the collateral tied to your loan.
To calculate your mortgage PITI, we use loan amortization calculators as well as tax records and insurance averages for your area. It is important that you can afford to pay for all four loan factors before you commit to pay a certain sales price.
Give us a call today - we'd love to help you buy or refinance your home!