What is PITI?
Key takeaways
- PITI stands for principal, interest, taxes and insurance — the four big elements of your monthly mortgage payment.
- You can calculate your PITI payment yourself or by using an online calculator.
- You may need to pay additional costs not included in PITI, such as homeowners association fees.
If you’re buying a home, you’ll likely come across the terms “principal” and “interest” when referring to a mortgage. These are common terms that describe what you’re borrowing and how much it’ll cost you: the big two elements of your loan repayments.
But other costs are also included in your monthly mortgage payments. The two most common are property taxes and homeowners insurance. Together, these four costs are known as “PITI.”
What does PITI mean?
PITI stands for principal, interest, taxes and insurance, all of which make up your monthly mortgage payment. Let’s parse PITI’s elements in more detail.
P is for Principal
The principal on your mortgage is the amount you borrow from a lender to finance a home purchase. Let’s say you’re buying a $400,000 home. You have 20 percent for a down payment, or $80,000. To pay the remaining amount, you secure a 30-year fixed-rate mortgage in the sum of $320,000. The loan principal, in this case, would be that $320,000.
I is for Interest
Borrowing money isn’t free. Besides principal, you’ll also pay interest on your mortgage — basically, a fee the lender charges to loan you money. It’s calculated as a percentage of your principal, otherwise known as the loan’s interest rate.
Following the example above, say your $320,000, 30-year fixed-rate mortgage has a 7.5 percent interest rate. At that rate, your monthly payment — covering the principal and the interest — would be around $2,237.
A mortgage is an amortizing loan, meaning you’ll repay it in installments over time. While your payment size doesn’t change, how the money is applied does. At first, more of your monthly mortgage payment goes toward the interest, but as you continue to repay your loan, more of that payment is applied to principal. (Mortgages tend to be structured this way because it’s less risky for the lender.) So, in the opening month of our mortgage above, around $2,000 of the payment would go towards interest, and around $237 towards the loan principal.
You can use Bankrate’s amortization calculator to see how the application of your monthly payments will change over time: how much goes toward principal and how much goes toward interest at different points in your repayment term, and the effect on the overall mortgage balance.
T is for Taxes
The taxes included in your monthly mortgage payment are property taxes, which are determined by the assessed value of your home or other homes in your tax jurisdiction. Typically, your lender collects these taxes for you through your mortgage payment, holds them in an escrow account and pays them on your behalf when they come due.
I is for Insurance
Lenders require you to purchase homeowners insurance to obtain a mortgage. This insurance protects you and your home — your mortgage lender’s collateral — if it’s damaged due to a covered reason, such as a fire or severe weather event.
Your homeowners insurance premium is typically included in your monthly mortgage payment. Like your property taxes, your lender will hold the premiums in escrow and pay your insurance company for you.
How to calculate your PITI payment
You can calculate your PITI payment by following these four steps:
1. Determine your principal and interest
Principal and interest costs will make up the largest portions of your mortgage payment. Let’s consider our earlier example: a $320,000 mortgage at 7.5 percent interest. It would result in a payment around $2,237 a month.
2. Research and add property taxes
The best way to account for property taxes is to research with your state or local government. Many states, counties and municipalities have property tax records and estimators you can use to understand how much property tax you’ll pay. For the most accurate estimate of your property taxes, contact your tax assessor and request a past record.
However, you can roughly estimate your monthly property taxes by dividing your property’s value by 1,000: Most taxes reflect a millage rate, which is $1 for every $1,000 of home value. So, for a $400,000 house, that’s $400 per month.
3. Estimate homeowners insurance cost
The average annual homeowners insurance premium for $300,000 in dwelling coverage is $2,270, or $189 a month. However, insurance costs can vary considerably depending on your home’s value, its location and the amount of coverage you purchase.
For an accurate estimate, get a few quotes for homeowners insurance from different companies. These quotes will not only help you understand how much you’ll pay, but they can also help you decide on a provider.
For the sake of our example, we’ll use $269 a month as our estimate, which is the average for $400,000 in dwelling coverage, according to Insurance.com.
4. Add totals together
Once you’ve estimated the elements of PITI, add them together to get your total monthly payment. For our example, this equates to:
$2,237 (principal and interest) + $400 (property taxes) + $269 (homeowners insurance) = $2,906 (total monthly PITI payment)
Mortgage calculator
Use our free mortgage calculator to estimate your monthly mortgage payments.
Use the calculatorWhat is not included in PITI?
Not all costs associated with a mortgage are automatically factored into PITI. These include:
- Mortgage insurance premiums: These premiums apply to many conventional loans with a down payment under 20 percent and all FHA loans.
- HOA fees: You’ll pay these monthly charges if you buy a property in a neighborhood with a homeowners association.
- Closing costs: These costs aren’t included in the calculation unless you financed them with your loan as a no-closing-cost mortgage. In this case, they’d be included in the principal and interest portion of your payment.
Why is PITI important?
Aside from looking at your credit score, lenders account for PITI and your other debt obligations to calculate your housing expense and debt-to-income (DTI) ratios, which helps them determine whether you’ll be able to repay the loan based on your financial situation.
Your housing expense ratio, which lenders commonly refer to as a front-end ratio, is your PITI payment divided by your monthly income. The DTI ratio, or back-end ratio, is the total amount of debt you owe on a monthly basis, including the PITI payment, divided by your monthly income.
An acceptable front-end ratio for many lenders is 31 percent or less, while the ideal back-end ratio is 36 percent or less. That said, some accept a back-end ratio of up to 43 percent or even higher.
Mortgage affordability and PITI
PITI isn’t only useful for lenders, it’s also valuable for borrowers. Calculating PITI payments independently also gives you some insight into costs as you shop for a home. Taking this step can help you estimate if a potential mortgage’s monthly payments will be affordable or break your budget.
You can then use your calculation to steer your home search in the right direction, focusing on homes and locations that best align with your finances.
FAQ about PITI
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Maximum PITI represents the largest monthly mortgage payment you can afford. If your lender requires a DTI ratio of no more than 36 percent, for example, your maximum PITI would be your gross income multiplied by 0.36, minus all other debt payments. If your income totals $7,500 a month, say, and you also pay $230 toward student loans, your maximum PITI would be $2,470.
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You can lower your PITI in several ways. The mortgage principal and interest will make up the largest portion of your payment, so shop around with at least three mortgage lenders and build your credit to qualify for the lowest rate. If you can make a bigger down payment, that’ll help lower your PITI, too, because you won’t need to borrow as much.
While you won’t have much say over your property taxes, you can keep the bill affordable by buying a cheaper home or a home in a low-tax area. Some municipalities also offer a discount if you pay your taxes in one lump sum.
And of course, you can – and should – comparison-shop for homeowners insurance. -
With a fixed-rate mortgage, your monthly principal and interest payments will stay consistent dollar-wise over the life of the loan, since your interest rate remains the same. However, you actually will be paying more toward principal and less toward interest as your loan term goes on.
If you have an adjustable-rate mortgage (ARM), you can expect the interest to change after the set introductory fixed-rate period, and to fluctuate at set periods thereafter. This means you could end up with a much higher monthly mortgage payment than what you started with.
Adjustments to your property taxes will impact your PITI, as will changes to your homeowners insurance premiums. -
Lenders use PITI when deciding whether or not to approve you for a loan, and to determine how much home you can afford. Most accept a debt-to-income (DTI), or back-end, ratio of 36 percent. Lenders determine your DTI by dividing your monthly expenses, including PITI, by your monthly gross income. A lower PITI can keep your DTI at or below the lender’s threshold and increase your chances of qualifying for a mortgage.
Additional reporting by Jess Ullrich
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