What is your mortgage payment made of? PITI Explained
- 14 September, 2021
When making a mortgage payment each month, you may be wondering... where is all my cash going? We like to use the simple acronym "PITI" to help break down the monthly mortgage payment into bite-sized pieces.
What is PITI?
PITI stands for principal, interest, taxes, and insurance. It's the acronym that most people forget about when they get a mortgage. PITI includes everything you need to know about where your money goes each month: you're paying down your loan balance (principal), as well as making monthly payments on interest, taxes, and insurance.
Principal Payment:
Your monthly principal payment is the amount of money that goes towards paying off your loan balance. You pay this on a monthly basis until you have completely paid it off which could be as long as 30 years! This amount of your mortgage payment that goes to the principal starts off as a much smaller amount when you have a large loan balance. As it starts to decrease, you pay less interest and more principal.
Interest Payment:
Your interest payment is the amount you pay to the lender for the ability to borrow the money. Interest rates vary and are determined by a number of factors including your loan term, credit score, down payment amount, type of mortgage product as well as other financial indicators. This amount is what many borrowers use to shop each lender but it's important to consider all the costs associated with a mortgage, not just the interest rate.
Taxes Payment:
Property taxes are paid to your local government and are usually a fixed annual amount. Homeowners also have to pay property taxes, but they vary depending on the local tax rate and how much area you live in.
Insurance Payment:
Most lenders will require homeowners insurance for protecting the mortgage and home value in case of damage. The cost of your insurance policy is based on market rates but it can also depend on where the home is located and if there are any significant risk factors such as consistent storms. If you live in an area that has these risk factors, expect to pay more or to find it harder to get coverage.
Your Servicer & How They Manage Your Payment:
Luckily for you, you do not need to split this payment four ways each month. You make one payment to your mortgage servicer each month. This payment will be collected and deposited into your escrow account. From there it will make the payments as needed. Items such as taxes and insurance are generally paid annually, but they will collect it as part of your mortgage payment each month to avoid hitting you with a large bill each year.
When you’re ready to buy a home, it can be helpful to know the breakdown of your monthly mortgage payment. This includes principal, interest, insurance, and taxes. To help you make an informed decision about what mortgage loan works best for your situation, it's important to speak with an experienced professional. If there is anything else you need or want to learn more about please contact us today!
