You’ve saved the money, and you’ve found a house. And now it’s finally happening for you. As part of the exciting process of buying your first home, you apply to the bank for mortgage preapproval.
In evaluating your request, the lender tells you they need to figure out if you can afford the monthly costs of homeownership, and then you hear a term you may not be familiar with: PITI.
What Does PITI Stand For?
PITI stands for principal, interest, taxes and insurance. It makes up your total monthly mortgage payment that helps determine if you qualify for a loan. While you may have roughly estimated the home price you could afford before you went to the bank, when all four of these costs get figured in, it can throw off your math.
PITI is a big deal, especially if you’re a first-time home buyer. These combined costs can affect whether you’re approved for a mortgage. If the total PITI figure is too high, you may have to rethink how much home you can afford.
Knowing what PITI stands for and how it’s used by mortgage lenders matters when you’re looking to finance a home.
What Does PITI Mean?
PITI includes the combined costs a lender uses when calculating your expected mortgage payment. The total is an important figure since your lender uses it to determine your ability to repay the loan.
Conventional mortgage lenders typically aim for a PITI that’s no more than 28% of your monthly income. For example, if your income is $5,000 a month, 28% of that would be $1,400. If your proposed home mortgage has a PITI at or below $1,400, your income would be enough to qualify you for the loan.
If it’s a bit higher, say $1,450 or $1,500 a month, you might be able to get financing, but it may take a higher down payment or a longer repayment schedule.
When the math works out and the PITI calculation shows that the mortgage payment is within your means, you’re more attractive as a borrower. A lower-than-expected PITI might even get you a lower interest rate or increase the size of the loan you qualify for.
Here’s a breakdown of the four PITI components that lenders look at:
The principal is the amount of money you borrow to buy a house. It’s the price you pay for the home minus your down payment. This is by far the largest single component of a mortgage loan, and it has the biggest impact on how much house you can afford to buy.
Interest is the amount of money the lender charges you for a loan. When you borrow money to buy a home, the lender fronts you the cash right away, which is given to the seller. You’re expected to pay back the principal plus interest every month over a certain number of years.
The interest rate you pay is based on various factors, such as the type of mortgage you apply for, the length of the loan and your credit score. The state of the economy and real estate market can also affect current mortgage interest rates.
As the new homeowner, you’re responsible for paying property taxes through your county or local municipality. Many borrowers pay their taxes as part of their monthly mortgage payment, and sometimes it’s required, such as with Federal Housing Administration (FHA) loans.
Lenders include taxes in the PITI calculation so they know borrowers have enough income to cover this cost. This is important because not paying property taxes can result in a tax lien on the property or even foreclosure.
When you buy a house, you’ll want to get a homeowners insurance policy to protect the property against fire, lightning storms, break-ins and other events. Plus, your mortgage lender may insist that you carry a certain level of coverage.
Besides homeowners insurance, if you put less than 20% down, you’ll likely have to pay monthly mortgage insurance. This type of insurance protects the lender in case you default on the loan.
Your lender will probably include the cost of homeowners insurance and mortgage insurance in their PITI calculation so they know you have sufficient income to make the payments.
How Do You Calculate Your PITI Payment?
The formula that’s used to calculate PITI isn’t too complicated.
PITI = principal payment + interest payment + tax payment + insurance payment
This is the dollar amount your lender determines you’ll have to pay each month to stay current on a mortgage loan.
Let’s say you found an amazing home with an ocean view and lots of space in the backyard, and the owner is asking $400,000 for the property. Here’s how to calculate the PITI:
Principal + Interest (PI)
You’ve agreed to pay $400,000 for your dream home and make a 10% (or $40,000) down payment. The principal amount of your mortgage would be $360,000.
Let’s say you get a fixed-rate 30-year mortgage with a 4% interest rate. Your lender will amortize your payments (you can see how this works using a mortgage calculator) so you pay the same amount to cover the principal and interest every month over the 360 payments you’ll make over the life of the loan.
In this example, you’d have a combined principal and interest payment of $1,718.70 a month.
PI = $1,718.70
However, the amount you’ll pay toward principal and interest will change over time.
When you make your first mortgage payment, $518.70 will go toward the principal and $1,200 will go toward interest. Every month after that, you’ll pay a little more toward the principal. That said, you’ll continue to pay more toward the interest than the principal until you hit payment 152. (FYI: that would be 12 years into your mortgage.)
If you have an adjustable-rate mortgage (ARM), your interest may be lower for the first 3 – 7 years but can go up or down annually depending on the terms of your loan.
Property taxes can vary depending on where you live, and you may need to pay a combination of state, city and local property taxes. At the state level, property taxes for homes with a mortgage can range from a median of $705 in Alabama to more than $8,553 in New Jersey.
To find out what your monthly tax bill might be, divide the home’s value by 1,000 and multiply that by your local property tax rate. Assuming your rate is somewhere in the middle, around 1%, that would be $4,000 a year. Divide that by 12 and you get $333 in monthly property taxes.
PIT = $1,718.70 + $333.33 = $2,052
Two types of home insurance are included in your PITI: homeowners insurance and mortgage insurance (if you put less than 20% down).
Homeowner’s insurance can vary wildly depending on where you live, the type of home you own and the level of coverage you get.
According to one study, the average cost of homeowners insurance is around $1,249. For our $400,000 home example, let’s assume it’s a little higher with around $1,500. Divide this by 12 to get your monthly insurance premium of $125 a month.
For a conventional mortgage (not backed by the government), expect to pay between $30 – $70 a month in private mortgage insurance (PMI) for every $100,000 borrowed. For our $360,000 mortgage, let’s assume $50 per month times 3.6 for a total of $180 per month in PMI.
PITI = $2,052.03 + $125 + $180 = $2,357.03
Why Does PITI Matter for Real Estate and Home Buying?
PITI has a big impact on how much money you can expect to borrow for a mortgage. This, in turn, affects how much house you can buy, what kind of terms you get and how much of a down payment you’ll need to make.
Lenders not only use the PITI figure to determine how much income you’ll need to afford a given loan amount, but they also use it to calculate your debt-to-income (DTI) ratio, which is a key factor in whether you get approved for a mortgage.
Lenders prefer a PITI that is at or below 28% of a borrower’s monthly income. You’d need a monthly income of about $8,400 to pay the $2,357.03 principal, interest, taxes and insurance on your $400,000 ocean-view home.
It’s important to remember that PITI isn’t the total cost of buying and maintaining a home. There’s the down payment. You’ll likely have to pay for home repairs and utilities. And you’ll have to pay your closing costs, which can include:
- A home inspection
- An appraisal
- Real estate attorney fees
- Title transfer costs
When you’re deciding if a particular home is the right investment, be sure to consider all its potential costs.
Lenders can consider a married couple’s combined income when calculating PITI. If you’re married, this can have an impact on how much home you can afford.
Understanding Your Mortgage Payments To Better Prepare
The more you understand about how the mortgage works, the better prepared you’ll be as you go through the home buying process.
Armed with an understanding of the way your mortgage payment is calculated, and the effect it will likely have on your approval for a loan, you can look for a home and mortgage that meets your needs and budget.Looking for more help? Using a mortgage calculator can help you check your numbers to see what kind of PITI you can expect on your new home.
Federal Deposit Insurance Corporation. “How Much Mortgage Can I Afford?” Retrieved January 2022 from https://www.fdic.gov/consumers/consumer/moneysmart/podcast/documents/borrowing-money-how-much-mortgage-can-i-afford.pdf
U.S. Census Bureau. “B25103 MORTGAGE STATUS BY MEDIAN REAL ESTATE TAXES PAID (DOLLARS).” Retrieved January 2022 fromhttps://data.census.gov/cedsci/table?t%3DReal%2520Estate%2520Taxes%26g%3D0100000US%25240400000%26tid%3DACSDT1Y2019.B25103%26tp%3Dtrue&sa=D&source=docs&ust=1643212147454061&usg=AOvVaw01ygv9pjs7yOH_Zw_8rq5H
Insurance Information Institute. “Facts + Statistics: Homeowners and renters insurance.” Retrieved January 2022 https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance#Expenditures%20for%20homeowners%20and%20renters%20insurance
Freddie Mac. “Breaking Down PMI.” Retrieved January 2022 from https://myhome.freddiemac.com/buying/breaking-down-pmi