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If you are in the market for a new home, you may hear and see the term PITI quite a lot, especially in the loan application process. What is PITI? Let us break it down for you.
WHAT IS PITI?
PITI represents the four parts that make up your mortgage payment: Principal, Interest, Taxes, Insurance. PITI is the dollar amount an underwriter factors into your monthly payments when determining how much home you can afford. Lenders like to see PITI less than or equal 28% of a borrower’s gross monthly income (you may hear this term called a front end ratio).
Principal is the amount of your loan. You pay a portion of this principal with each mortgage payment. Typically, your principal payments are initially quite low as the majority of these initial payments is interest, which is a great tax benefit.
Over time, you reduce the outstanding principal balance and your equity in the home equity increases.
Paying down the principal is what reduces the overall balance of your loan. You can also make additional payments at any time towards paying down your principal.
FYI: Interest only loans are available. With such loans, principal payments don’t kick in until several years into the loan.
The interest is the percentage amount a lender charges you for borrowing the money to buy a home. Again, your initial mortgage payments will be mostly interest, however this ratio will shift over time. If you have a fixed-rate mortgage, the rate you pay remains the same over the life of the loan. With an adjustable rate mortgage, your rate will fluctuate with the interest rates in the broader economy.
These taxes are those property taxes paid to the municipality in which you live (city, town, or county). These taxes provide the funding for local schools, roads, and emergency services such as police and fire. Property taxes can vary widely within a metropolitan area so always check what the tax rate is in the municipality you are targeting. When you are househunting, you can check what the current property taxes are on the MRIS/MLS listing sheet, though these are always subject to change.
You may pay your property taxes directly to your assessor, but often, lenders prefer to escrow them and pay the tax bill on your behalf, ensuring the taxes are getting paid as required.
Property taxes are also a federal income tax deductible item.
This Insurance portion of PITI is your property or homeowners’ insurance. Homeowners’ insurance covers a wide range possible issues — from water damage, fire, and weather related losses. It also covers your possessions (be sure to make an inventory of your valuables when packing to move). Also included is liability insurance, which would be used if someone fell down your stairs, for example.
Be sure to shop around and get various quotes for homeowners’ insurance, as it is one area where you do have some control over the costs. We recommend doing this before the end of your home inspection or condo/HOA review period in case the insurance on your future home is more than you anticipated.
You may hear the term PMI or private mortgage insurance. If you have put less than 20% down on your home, your lender will require PMI. This insurance protects your lender should you become unable to pay your mortgage.
A FINAL NOTE
When comparing mortgage rates from different lenders, make sure sure the quoted payments represent the same costs (for example, compare PITI with PITI or just the principal and interest payments).
We know homeownership lingo can be overwhelming. As always, we are here to help! Reach out if we can answer any questions on the home buying process or real estate in general.
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