What Is PITI?
A mortgage payment is composed of principal, interest, taxes, and insurance. Homeowners’ insurance and private mortgage insurance payments are included in the principle, loan interest, and property tax. PITI is normally quoted monthly and compared to a borrower’s monthly gross income to compute front-end and back-end ratios. Lenders prefer that the PITI be equal to or less than 28% of the borrower’s gross monthly income.
KEY LESSONS
- PITI stands for principle, interest, taxes, and insurance.
- Because PITI reflects the monthly mortgage payment, it helps both the buyer and the lender in determining mortgage affordability.
- Lenders prefer that the PITI be equal to or less than 28% of the borrower’s gross monthly income.
- PITI is also included in a borrower’s back-end ratio, which compares monthly payments to gross income.
Understanding PITI (Principal, Interest, Taxes, Insurance)
Let’s examine PITI’s four components.
Principal
Each mortgage payment goes toward paying off debt some of the loan’s principles. The principle on a $100,000 debt is $10,000,000. The loan’s initial interest is minimal, but it goes way up.
Interest
You must pay interest if you take out a loan. This is what you have after getting a risk with the lender’s money, so take it gratefully. First-year mortgage payments are more likely to have been used to pay interest than they are to lower the total debt. It would cost us $599.55 a month and pay off our $100,000 loan if it had a 6% lending rate: $500 interest and $99.55 principal.
Taxes
Including taxes in your monthly mortgage payments is possible, and it is based on the number of mortgage payments made in a particular year. Property taxes are collected by local governments to pay for public services such as schools, police, and fire. Until taxes are paid, all payments are escrowed.
Insurance
Insurance premiums can be paid regularly and held in escrow until they are due, just like property taxes. Fire, theft, and other calamities are covered by homeowner’s insurance; in contrast to this, buyers who put less than 20% down on a home are forced to purchase private mortgage insurance (PMI).
PITI’s Mortgage Positioning
To help buyers and lenders determine if they can afford a mortgage, PITI includes the monthly mortgage payment. Lenders use PITI to determine a borrower’s likelihood of defaulting on a mortgage loan. To determine if they qualify for a mortgage, buyers can run their PITI numbers. It’s common to compare PITI to a month’s worth of gross monthly revenue. There are a few lenders who will tolerate a front-end ratio of up to 30 percent, but the vast majority of lenders prefer 28 percent or less. 25 percent of a $6,000 gross monthly income comes from a $1,500 PITI.
Monthly debt obligations such as PITI and other monthly obligations are compared to gross monthly revenue in the back-end ratio. Back-end ratios of 36% are preferred by the majority of lenders There is a back-end ratio of 33 percent with a $400 car payment and a $100 credit card charge. (PITI: $1,500 + $400 / $6,000 = 33 percent). Borrowers’ reserve requirements can be estimated using PITI by some lenders. To protect themselves from the loss of a borrower’s income, lenders require reserves. Lenders often cite a multiple of PITI as a standard rate. Two months’ worth of PITI is a common reserve requirement. Having $3,000 in a bank account would be enough to secure a mortgage for the borrower in the previous example.
Considerations
Taxes and insurance aren’t typically included in the price. Certain lenders may not include these costs in the monthly mortgage payment. Insurance and tax assessors are paid directly by the homeowner in these circumstances. In other words, the principal and interest are the only components of the monthly payment.
Front and back-end ratios take into account property taxes and insurance premiums even if they are not escrowed. For debt ratio calculations, additional mortgage-related monthly costs, such as HOA fees, may also be included.