What is the PITI payment?

When it comes to buying a home everything revolves around your mortgage payment. Whether you’re buying a new home or refinancing an existing loan, mortgage lenders are going to calculate the monthly payment for your new loan and try to understand if you can afford it based on your debt-to-income ratio. When going through the underwriting process mortgage lenders look at the PITI payment for your loan. This is the total monthly payment which includes the principal and interest payment for the loan, the monthly cost of property taxes and homeowners insurance, as well any mortgage insurance premiums and HOA fees.

 

What does PITI stand for?

The payment for your mortgage debt is called your principal and interest payment, or “P & I payment.” This is the bulk of your monthly payment, but it’s not all that’s required.

When calculating your mortgage payment, lenders often use the PITI payment. This stands for

  • Principal
  • Interest
  • Taxes
  • Insurance.

Whenever you are determining your max purchase price, or a lender is qualifying you for a loan, the PITI payment is the payment they’re going to focus on. These additional costs can have a big impact on your home affordability. You can play with our mortgage affordability calculator to see how big of an impact each part of the PITI payment can have.

 

Mortgage P&I payment – principal and interest

This is the most straightforward part of the PITI payment. It’s the monthly payment amount to repay your loan. Part of this payment goes to paying off the interest on the loan. The rest goes toward paying down the outstanding principal balance on your loan so you can eventually pay the loan off. All mortgages are set up so that they will be completely paid off at the end of the loan.

Mortgage lenders consolidate principal and interest into a single monthly payment. This is the payment amount they display when giving you a quote, you can see what your principal and interest payment would be by entering your information in the calculator below.

 

Property taxes and homeowners insurance

Outside of the amount you pay every month for your mortgage debt, there are two other things that factor into your total mortgage payment: Property Taxes & Home Insurance.

Property taxes

Not everyone pays property taxes, so in some cases there’s no additional amount added to the PITI payment. Property taxes are determined at the county level, so depending on where you live, you may not have any property taxes (I’m looking at you, entire state of South Dakota.) Other places have really high property taxes to account for the lack of things like income tax. For example Dallas clocks in a monstrous 2.4% average annual property tax, which amounts to thousands of dollars per year in additional payments.

Because it differs county to county, property tax data is ridiculously hard to find online. Thankfully, our friends at RealtyTrac put together this great map that you can explore below.

When you buy your home, you’ll have to option to manage these payments yourself, or have your mortgage servicer make the payments for you. Another quirk with property taxes – when they are due to be paid varies from county to county.

In places like Los Angeles County, they’re due in November and February. In New York City, they’re due either quarterly or semiannually starting on July 1st. This can get confusing, and there are steep penalties if you forget a payment. Paying your taxes monthly may not be the most financially efficient thing to do, but it could save you from a massive headache.

You have the option to pay your property taxes monthly with the rest of your payments, or all together when they’re due. However, when calculating your Number, lenders look at your monthly expenses, so they assume you will pay (or at least budget for) those costs monthly.

If you choose to pay property taxes monthly, you can let your mortgage servicer send the payments to the county. You pay your entire PITI payment every month and they take care of the rest. In this case, it’s still good to be aware of how your county works so you can make sure your payments are properly applied. If you chose to pay property taxes yourself, you’ll owe taxes in a lump sum when they’re due, so don’t forget to budget for them!

 

Homeowners Insurance

If your mortgage is Vince Vaughn in Wedding Crashers, homeowners insurance is the Stage 5 Clinger – no matter what you try to do, you can’t get rid of it. Lenders require it because if something happens (say you burn the house down) then suddenly their loan isn’t secured with a house they can sell. They need to be sure that in the case of a major disaster the house will be rebuilt.

Lenders include the cost of homeowners insurance as part of your payment because they require it. This will nearly always include hazard insurance. In some cases the lender may require additional types of insurance, like flood insurance or earthquake insurance, but this is usually judged on a case by case basis and often depends on the location of your home.

 

Homeowners association dues

Homeowners associations, or HOAs, are a critical part of maintaining your home value when living in a condo, townhouse, or community with shared amenities like a community pool. It’s important for lenders to make sure there is a strong HOA that can cover the cost of maintaining shared items, like roofs or parking lots, so the property is livable and maintains its value. For this reason, mortgage lenders include the cost of HOA fees during the underwriting process and include them in your PITI payment.

 

Private Mortgage Insurance (PMI / MIP)

In most cases first time home buyers have a down payment that is less than 20% of the home value. In these cases, the lender will require mortgage insurance for the loan, often referred to as private mortgage insurance or a mortgage insurance premium.  This additional fee can be paid in two ways.

Upfront mortgage insurance

New home buyers have the option to pay a one time fee for mortgage insurance and include it as part of their closing costs. In this case, mortgage insurance would not be included as part of the PITI payment. This could be a good option for buyers who have some extra cash on hand but have a tight monthly budget, or for borrowers who don’t intend to stay in the home for a very long time.

This is often referred to as “lender paid mortgage insurance” because the mortgage lender collects the fee upfront and pays it directly to the mortgage insurance company.

Monthly mortgage insurance

The other option is for borrowers to pay their mortgage insurance monthly and include it in their total monthly payment. In these cases, mortgage insurance would be included as part of the total PITI payment for the loan. This could be a good option for buyers who have limited cash to close but have a low debt-to-income ratio.

Monthly mortgage insurance has the added bonus that it can be removed from the loan. Once the loan amount dips below 80% of the home value, the borrower can request that mortgage insurance be removed. When that happens the monthly payment for the loan will actually go down! This makes monthly mortgage insurance a great option for borrowers who intend to stay in the home for a very long time, the payment will be reduced over time and you can lock in an affordable interest rate for the long term.

 

What is not included in your mortgage PITI payment?

There are two things that are not included in your monthly payment that you should be aware of.

The first is your home maintenance costs. These will vary every year and will depend on how old your home is, but a good rule of thumb is to budget 1-2% a year. We recommend checking out our home maintenance checklist to understand what to expect.

 

Your payment also doesn’t include any utility payments. Power, water, gas, internet, and cable/satellite can add up quickly. If you’ve paid these as a renter you’ll have a good idea what they cost. Otherwise ask around so you can budget accordingly.

 

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