What is PITI in real estate?
It is your 4-part monthly mortgage payment. Your monthly mortgage payment can be broken down into four parts: principal, interest, taxes, and insurance. Together, these parts are known as “PITI.” Mortgage lenders look at your entire PITI payment, not just principal and interest, when they determine how big of a loan you qualify for. So you’ll want to factor in all four parts when you estimate your home buying budget.
Mortgage escrow is how you pay your PITI
A mortgage escrow account lets you pay all four parts of your PITI — principal, interest, taxes, and insurance — at once. If you have a mortgage escrow, you’ll pay your homeowners insurance and property taxes in monthly installments to your mortgage lender, along with your principal and interest, instead of paying the insurance company and tax agency directly.
What Is PITI?
When you own a home, your fiscal responsibility goes deeper than just making monthly mortgage payments to the bank. Real estate taxes and homeowners insurance are required, too.
These four components add up to your “PITI” — your total monthly payment as a homeowner:
Finding your PITI is important for a number of reasons. It gives you a realistic budget for homeownership.
And, PITI gives you an idea of how much mortgage you’ll qualify for. Therefore it’s a crucial number when you’re trying to figure out your home buying budget.
How PITI affects your mortgage
When you get a mortgage, lenders have to verify your “ability to repay.” To make sure you’ll be able to afford your monthly mortgage payment, a lender is going to compare your projected PITI to your monthly income.
You’ll only be approved for a mortgage if your PITI, combined with your existing monthly debts, takes up less than 43% of your gross income (or 50% in special cases).
That’s why it’s important to consider all the costs of your mortgage when you’re estimating how much house you can afford.
You can get a better estimate by using a mortgage calculator that includes principal, interest, taxes, and insurance — the entire PITI package.
How to calculate your PITI correctly
You can use a calculator to easily estimate your PITI payment online.
The number you get won’t be exact, because mortgage rates change every day, and your taxes and insurance will likely be estimated. But this will be a close enough figure to start budgeting off of.
The first two parts of your PITI — principal and interest — are easiest to estimate. You can find today’s mortgage rates online. And when you use a calculator, your principal payments will be automatically calculated based on your loan amount.
Figuring out your taxes and insurance is a little more involved.
To estimate your property taxes, you’ll need to know the home’s value and local tax rate. You may already know the home’s value if you have your eye on a property. But you can also check public records online. And tax rates can be found on your local tax assessor or municipality website.
See this helpful article on calculating your property taxes for more.
To find out what your homeowners insurance premium will be, estimate 1% of the purchase price. This will yield an estimate which is likely larger than your actual premium, but when building a budget, it’s often better to estimate on the high side.
Next, divide your sum by the 12 months in a year.
As an example, a Rutherford County, TN home with an $2,400 annual tax bill and a $1,200 insurance policy will pay $3,600 annually. This yields $300 paid into escrow monthly as part of PITI.
These monies are paid along with the mortgage payment’s principal and interest portion.
This Post was originally published on themortgagereports.com