As you enter the real estate market in search of the perfect property, you must have a clear grasp of your financial situation. Many people are so concerned about home asking prices that they lose sight of the additional expenses of homeownership.
So before you set your sights on a home and begin the mortgage loan process, you need to know whether you can afford the costs of homeownership, which includes understanding the concept of PITI and how it impacts your monthly mortgage payments.
What Does PITI Stand For?
PITI (usually pronounced “pity”) stands for principal, interest, taxes and insurance. The acronym describes the four major elements that make up a mortgage payment. Home buyers usually focus primarily on a mortgage’s principal payment and interest, but you must focus on all the components of your monthly mortgage payments.
Buyers often underestimate the true cost of their monthly mortgage payment by failing to account for property taxes and homeowners insurance. These two components can sometimes double your monthly housing expenses, which is why you must budget for your PITI payment before settling on a new home.
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PITI In Real Estate: What Makes Up Your Monthly Payments?
A home’s purchase price can give some insight into its total expenses. However, you can get deeper insight by examining the individual costs included in your monthly mortgage payment.
Principal And Interest
A mortgage is a loan a lender gives you to purchase (or refinance) a home. Your lender will provide an amortization schedule, which is a complete list of all your monthly loan payments, breaking down how much you’ll pay in principal (the amount of money you borrowed to purchase the property) and interest (the fee charged by the lender based on the amount borrowed).
If you check your amortization schedule, you’ll see most of your money goes toward interest during the earlier years of your mortgage repayment. Over time, as the interest payment decreases, more of your mortgage payment will go toward the principal balance.
Property Taxes
Property taxes are the third component of PITI. The amount of taxes you pay on your home depends on the appraised value of the property and the property tax rate charged by your state and local government. The money funds public services, including libraries, road maintenance and public schools.
You usually receive a property tax bill annually or every 6 months. To ensure on-time payment, your lender usually deducts a portion of your monthly mortgage payment and deposits it into an escrow account. Your lender pays the property tax bill directly, and in some cases, your lender may adjust the amount they collect for property taxes to account for any changes in property tax rates or an increase in your home’s value.
Homeowners And Mortgage Insurance
Your PITI also includes homeowners insurance, which protects your home from loss or damage. Since your home is collateral for your mortgage, the insurance is also a precautionary measure to safeguard your lender’s investment in the home.
Like property taxes, the money for home insurance is held in an escrow account and paid by your lender when the bill is due.
Mortgage insurance is a monthly fee you may need to pay if you purchased your home for less than 20% down.
- Conventional loans: You’ll typically pay monthly private mortgage insurance (PMI) until you’ve accrued 20% equity in your home, which translates to an 80% loan-to-value ratio (LTV) on your mortgage.
- Federal Housing Administration (FHA) loans: If you make a down payment of 10% or more, you only pay a mortgage insurance premium (MIP) for 11 years. If put down less than 10%, you’ll pay MIP for as long as you own the loan.
Homeowners Association Fees
Homeowners association fees (HOA) aren’t part of the traditional PITI acronym, but the PITIA acronym, which includes HOA fees, is gaining popularity in real estate. HOA fees are paid through an escrow account or directly to the homeowners association or property management company.
How To Calculate PITI
Calculating your PITI (principal, interest, taxes and insurance) at the start of your home buying journey can help you save time. When you know the PITI payment you can afford, you’ll spend more time touring homes in your price range and less time touring too-expensive homes.
We’ll show you how to calculate PITI to help you create a realistic budget that covers home buying and homeownership costs.
1. Calculate Your Principal And Interest
When you’re close to purchasing a home, you’ll find the principal and interest amounts in your Closing Disclosure. If you have a fixed-rate mortgage, the principal and interest portion of your monthly mortgage payment will stay the same for the life of the loan. If you have an adjustable-rate mortgage (ARM), this portion of your mortgage payment will likely change based on the terms of your loan.
If you’re just starting the home buying process, use our Home Affordability Calculator to determine the maximum amount you can afford to pay for a home. It won’t break out your estimated principal and interest, but the estimate will help you narrow your search for a home and set realistic home buying goals.
2. Estimate Your Property Taxes
Use this formula to determine how much you may pay toward property taxes each month:
Monthly property taxes = Assessed value of your home ✕ Annual county tax rate ∕ 12
For example, if your home’s assessed value is $300,000 and your property tax rate is 1.2%, your annual property tax bill would be $300,000 ✕ 0.012 or $3,600. Your lender will divide your annual property taxes into 12 monthly payments, which equals $300. The monthly property tax amount gets automatically added to your monthly escrow payment.
3. Determine Your Annual Homeowners Insurance Cost
Your homeowners insurance payment will depend on several factors, including the value of your home and the level of coverage you choose. In some areas, you may pay additional insurance premiums for floods, tornadoes or other natural disasters. Before buying a home, get quotes from a few different insurers to help determine your monthly costs. Shopping around may even help you secure a very affordable policy.
4. Ask Your Lender About Your Mortgage Insurance Costs
If you make a down payment of less than 20% on a conventional loan or buy a home with an FHA loan, you’ll likely pay mortgage insurance. Your lender must disclose all information about mortgage insurance costs before you close on your loan. If you’re applying for a conventional loan, you may want to ask your lender how long you’ll need to pay for PMI.
5. Figure Out What Your HOA Fees Will Be
The HOA fee is a monthly fee all HOA members are required to pay. In addition to the annual fee, your HOA may also charge for special assessments, which are extra fees charged by an HOA or condominium association to cover special projects or repairs. Depending on the HOA, you may pay fees for violating any rules or regulations set by the association.
Before buying a home connected to an HOA, find out what the HOA fees are, review the rules and ask whether any potential assessments may be on the horizon.
6. Add It All Together
Take a look at our example demonstrating how to calculate PITI.
Let’s say you take out a $300,000 mortgage at a 7% interest rate. Now, imagine the home has been appraised at $300,000 by your county tax assessor, and your tax rate is 1.2%. Your annual homeowners insurance is $2,000 ($166.67 a month). You’re paying $40 a month for PMI, and your HOA charges a $200 monthly fee.
PITIA Expenses | Cost |
|---|---|
Principal And Interest | $1995.91 |
Property Taxes | $300 |
Homeowners Insurance | $166.67 |
PMI | $40 |
HOA Fees | $200 |
TOTAL | $2,702.58 |
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How PITI Impacts Your Mortgage Application
PITI directly impacts your mortgage because its four main components make up your monthly mortgage payments. However, you can and should use PITI to work backward. You and your lender can evaluate your PITI to help determine your financial readiness for homeownership and explore mortgage options.
It Helps Determine How Much House You Can Afford
Borrowers can calculate the maximum amount they can spend on PITI by looking at their monthly expenses. Checking in with your budget can help you avoid buying more home than you can afford.
Knowing how much money you have to spend every month can help you determine the maximum price of a new home. When you start your home search after calculating PITI, it can help you maintain a pragmatic mindset that quickly rules out all the homes above your affordability comfort zone.
It Helps Mortgage Lenders Decide Whether To Approve You
In addition to helping establish how much you can afford to spend on a home, PITI provides mortgage lenders with insight into your creditworthiness and financial stability. Calculating PITI is one way lenders determine whether you qualify for a loan.
Once a lender has calculated PITI, they’ll compare it to your income to ensure it doesn’t dramatically increase your debt-to-income ratio (DTI) and you can afford to pay off your mortgage.
PITI FAQs
Still have questions about PITI, including how it can affect your ability to finally own a home? We can offer some more insight.
How does PITI align with the 28% rule?
Mortgage lenders measure your PITI against your income to determine whether you qualify for a loan. According to the 28% rule, the percentage of your income that goes to your mortgage shouldn’t exceed 28% of your gross monthly income, which is your salary before deductions.
The lower your percentage, the more willing lenders will be to offer you a loan. If your PITI is too high, consider making a higher down payment, finding a less expensive home or increasing your income.
How does my mortgage type affect my PITI?
Different loan types may affect how much your PITI is. If you take out a fixed-rate mortgage, your principal and interest stay the same over the life of the loan. If you take out an adjustable-rate mortgage (ARM), your interest will adjust after the ARM’s introductory period ends. If you take out an ARM when interest rates are low, prepare for a higher monthly payment if interest rates climb after the intro period.
Is the assessed value of my home the same as the fair market value?
The assessed value of your home isn’t the same as its fair market value. A home’s fair market value is the amount you may sell your home for. A local government agency calculates a home’s assessed value to determine property taxes. By the way, your state and county tax rates aren’t a secret. You can usually find them by searching your state’s treasury department website.
Your property tax bill can vary annually depending on changes to your state and local property tax rates or the assessed value of your home.
The Bottom Line
Before you start your home buying journey, make sure you have a handle on all the financial responsibilities of homeownership. If you only have enough money to cover the principal and interest on your mortgage and haven’t started saving for taxes and insurance, take time to save enough money to comfortably afford a home.
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Victoria Araj
Victoria Araj is a Staff Writer for Rocket Companies who has held roles in mortgage banking, public relations and more in her 15-plus years of experience. She has a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.
