What is the PITI in a mortgage loan?

9/21/2023

If you are looking for a mortgage or calculating your monthly payments if you are going to take out a mortgage you may have come across the word PITI.

The PITI refers to the monthly mortgage payment including Principal, Interest, Taxes and Insurance. The monthly mortgage payment includes all of these items and is called the PITI.

In a normal loan, the monthly payment includes interest and principal (the part of the loaned money that is repaid each month), but in a mortgage you must add the property tax corresponding to the house and the homeowner's insurance.

The set of all the items that make up the monthly payment of a mortgage is the PITI. This is something you should know so you don't make a mistake when making calculations with a loan simulator or calculator. When you apply for a mortgage the lender will calculate the PITI before deciding if you qualify for a mortgage.

What does each part of PITI mean?

It is already clear that PITI is a term used to calculate monthly mortgage payments taking into account principal, interest, taxes and insurance. Let's take a look at what each part of PITI means.

Principal

The first part of the PITI is the principal, the amount of money you borrow on a mortgage to finance the purchase of the home. Imagine you buy a home for $500,000 and you have savings of $100,000. In that case you would borrow $400,000, which is the principal amount of the mortgage.

If it is a 30-year fixed mortgage, what remains is a mortgage with a principal of $400,000.

Interest

Interest is the amount of money you pay to the mortgage lender in exchange for lending you the money you need (the principal) when buying a home. This is key to the PITI calculation.

The amount of interest you pay is calculated based on the interest rate at which you are granted the mortgage. If you sign a mortgage contract for an interest rate of 6.5%, with that rate the interest you have to pay is calculated based on the amount of money you have left to pay in principal and time.

As you make monthly payments the amount of interest you pay is less each month.

Continuing with the previous example, if you take out a mortgage with a 6.5% interest rate of $400,000 for 30 years, you would pay a monthly payment of $2,528, of which the first month $2,166 corresponds to interest.

As the months go by, the amount of interest paid decreases, so in month 20 the interest is $2,127, in month 100 it is $1,910 and in the 300th monthly payment it is $709.

The monthly payment does not change, but at first a larger portion of your monthly mortgage payment covers the interest cost, but as you continue to repay the loan, a larger portion of that payment covers the principal.

Taxes

The taxes in the PITI refer to the payment of the property tax, the amount of which is determined by the value of the property and its location. Generally, this tax is collected by the mortgage lender itself through the mortgage payment, which is why it must be taken into account when calculating the monthly payments, and is therefore part of the PITI.

The amount of the tax depends on the value of the property and the local rate that applies to the tax. In a mortgage calculator, it is common to enter the ZIP Code to determine the property tax rate.

Although the tax rate is different in each locality it usually averages $1 per $1,000 of home value per month. In our example of a $500,000 home the tax would be approximately $500 per month.

When purchasing a home, an official appraisal must be done to accurately calculate the tax portion.

Insurance

Most states in the U.S. are not required by law to carry insurance, but most mortgage lenders require that you carry homeowner's insurance in order to obtain a mortgage. The cost of insurance is included in the PITI calculation for calculating monthly mortgage payments.

Insurance covers damage to the home, and is the lender's way of protecting itself against such damage.

The cost of insurance is usually included in the monthly mortgage payment.

The cost of insurance will depend on the value of the home, the risks it covers, and the insurer's rates. On average, the cost is about $45 per $100,000 of the home's value per month.

How to calculate the monthly PITI payment?

Once we have explained each part of the PITI, it is easy to calculate the PITI of a mortgage. The steps to follow are as follows.

1.- Determine the monthly payment

Calculate the mortgage payment taking into account the principal, the interest rate and the term. It can be easily calculated with a loan calculator or using Excel.

In our example we have a mortgage with a principal amount of $400,000 for 30 years with an interest rate of 6.50%. The result is a monthly payment of $2,528.

2.- Calculate Property Taxes

If you know exactly how much property taxes are paid in your area, you only need to add them up. If you don't know, you can do some research and find out the rates to be paid at the local government. You may be able to find on the Internet some tax estimates by states, municipalities or counties to know the tax due.

If you do not get the exact figure you can calculate approximately that you will pay $1 per month for each $1,000, so in our $500,000 house you can estimate a tax payment of $500 per month.

3.- Calculate the monthly cost of the insurance.

If you know the cost of the insurance you calculate it on a monthly basis, you can also make a simulation using the data of an insurance quotation system.

If you do not know the price you can make a quick calculation using the data of the average annual premium for homeowners insurance. Currently the average price is $45 per $100,000 per month. In our example the cost of insurance is $225 per month.

4.- Calculate the PITI

To calculate the PITI or the monthly cost of our mortgage including insurance and taxes we have to add the 3 previous figures. In our example it would be: