Principal Interest Tax and Insurance - The Most Important Number a Buyer Needs to Know

Principal, Interest, Tax, and Insurance - Components of your mortgage payment.
Principal, Interest, Tax, and Insurance - Components of your mortgage payment. | Source

Your PITI

You’re sitting at the front of your loan agent’s desk and the loan agent says, “Your PITI is going to be $1,000 a month.” “My PI… what?” you ask, puzzlingly. But, the loan agent continues talking, not getting the clue that you have no idea what a PITI is. So, now the only thing you hear coming out of the loan agent’s mouth is, “Blah, blah, blah, blah, blah, blah, blah.”

I hear you! Professionals in the loan industry assume every home loan borrower who applies for a home loan should automatically know what PITI means. The truth is, the first time many borrowers come in contact with the concept of PITI is at the moment the borrower sits down with a loan agent for the first time.

Mortgage

Mortgage is another word for home loan.

PITI

PITI is real estate loan jargon for Principal, Interest, Tax, and Insurance. The acronym, PITI is the monthly mortgage payment. It is the amount of money you need to pay back the loan on your house each month.

  • Principal
    The “P” stands for Principal. The principal is the amount of money that you borrowed. It is the amount of money owed on the loan. Your monthly principal is the amount of money that you pay each month.
  • Interest
    The first “I” stands for Interest. When you borrow money, the lender will charge interest on the money you borrowed. Your monthly payment includes interest to be paid back on a monthly basis.
  • Tax
    The “T” stands for property Tax. Although property tax is paid to the tax assessor’s office in two installments six months apart, the yearly amount you owe for property tax is divided over a 12-month period. You need to save 1/12th of your yearly property tax amount each month in order to be able to pay your bi-annual property tax bill when the tax comes due.

Private Mortgage Insurance

Whenever a borrower puts less than 20% down toward the purchase of a home, the borrower must have Private Mortgage Insurance (PMI). This insurance is in place to protect the lender against loss if the borrower defaults on the loan.

  • Insurance
    The second “I” stands for Insurance. There are two kinds of insurance. One is Homeowner’s Insurance, like earthquake insurance, flood insurance, and fire insurance. The other type of insurance is Private Mortgage Insurance. The yearly amount you owe for insurance is divided over a 12-month period. This is money you need to save each month to be able to make your insurance premium payments each month.

What’s Your PITI?

If you would like to see what the PITI is for a particular loan, there is an online calculator that you can use. Visit PiTiCalc. The online calculator is a fun and valuable tool. In order to use this online calculator, you will need to have the following information handy:

  • Your mortgage amount
  • The interest rate being charged for your loan
  • The term of your mortgage (for example: 40-year, 30-year, 20-year, etc.)
  • The value of the home
  • Property tax percentage
  • The yearly insurance amount
  • The purpose of the loan (for example: Purchase or Refinance)

In the table below, I have entered information in the PiTiCalc online calculator to calculate what the PITI might be for a loan amount of $160,000. In this scenario, I put down $40,000 on a $200,000 house so that I would not have to pay PMI. Of course, when you use the calculator, you would enter the information that pertains to your own personal situation.

EXAMPLE PITI Calculation Using the Online Calculator at PiTiCalc

Item
Value
Mortgage
$160,000
Interest Rate
4.825%
Mortgage Term
30 Year Mortgage
Home Value Price
$200,000
Property Taxes
1.25%
Yearly Insurance
$800
Loan Purpose
Purchase Mortgage
RESULT: PITI Calculated
$1,121.73
After receiving the result of your PITI calculation, the online calculator program provides a breakdown of the payments and additional helpful information.

Housing Expense / Income = Housing Expense-to-Income Ratio

How is PITI Used in Qualifying for a Loan?

The PITI is used to calculate your Housing Expense-to-Income Ratio. The PITI is your housing expense. The amount of money you earn each month (before taxes are taken out) is your income. So, your housing expense divided by your income equals your Housing Expense-to-Income Ratio. For example, if your PITI is $1,000.00 and your monthly income is $4,000.00, then your Housing Expense-to-Income Ratio is 25%.

Lenders normally require you to have at least two months of PITI in your bank account, retirement account, stocks and bonds, or anywhere you have money that is readily available in case you need to use the money to make a mortgage payment.

PITI / 28% = Loan Qualification

Another thing to know is that most lenders want your PITI to be only 28% of your income. So, your PITI divided by 28% equals your loan qualification. For example, if you want to qualify for a $1,000.00 mortgage, then your monthly income (before taxes) would need to be at least $3,571.43.

Mortgage terms: Key definitions you should know when financing a home

More Knowledge Offers More Confidence

Your PITI is, by far, the most important number that will be calculated in the process of determining whether or not you qualify for a home loan. Knowing what the numbers mean will allow you to have a handle on what is acceptable and what is manageable for your monthly mortgage payment.

The video, Mortgage terms: Key definitions you should know when financing a home, explains additional terms a buyer should know. In addition to PITI, watch to learn what amortization means and what an escrow account is.

Now, when you sit down in front of the loan agent’s desk, you can ask confidently, “So, what’s my PITI?”

RESOURCES

Housing and Urban Development (HUD)

HUD is a government agency established to assure fair housing and strong communities for the home buying public.


PiTiCalc

PiTiCalc is a web page where you can input loan information into an online calculator that will compute your Principal, Interest, Tax, and Insurance for your loan.


"Real estate information; clear and simple!"

Marlene Bertrand is a Broker/REALTOR®.
Calif. Bureau of Real Estate Lic. #01056418.

© 2013 Marlene Bertrand

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Comments 10 comments

MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello drmiddlebrook. Closing day?!!! Well, I believe it because some professionals don't even bother mentioning it at all. But, you're right, it is more helpful to know ahead of time. By the way, I'll join you in prayer that if you buy another house you can forego the "P & I". That's actually another thing agents throw out without explaining it - P & I, expecting the borrower to know that it means Principle and Interest.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello Mhatter99. Knowing that the information is presented clearly means I met my goal of keeping it clear and simple. Thank you. Your comment is quite comforting to me.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello catmalone, yes, PITI is a factor in every real estate loan, but sometimes borrowers go through the whole transaction without fully understanding what it means. Thank you very much for your feedback.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi Faith Reaper, I'm so glad this information is helpful. After over two decades in the real estate industry, a lot of this stuff is still stuck in my head. Someone asked me about it the other day and after answering her question, I thought it would make a helpful hub. Thank you very much for your positive feedback and for sharing this hub with others.


drmiddlebrook profile image

drmiddlebrook 3 years ago from Texas, USA

This is very educational, MarleneB. Thanks so much for doing such a great and caring job on it. I know it is going to help a lot of people. I bought my first home in 2006, and even though I had no problem with the concept, it would have been nice if I'd heard it before "Closing Day." If I ever purchase another home, I'm praying God will bless me to be able to pay for it without needing a mortgage. Even though I'll still have the "T" and the last "I," it would be super nice not to have to worry about the "P" and the first "I!" Wink, smile.


Mhatter99 profile image

Mhatter99 3 years ago from San Francisco

You certainly drew a clear picture. thank you


catmalone profile image

catmalone 3 years ago

I like this hub. It is very well written and clearly understood. This is very educational and something everybody needs to know when buying a home.


Faith Reaper profile image

Faith Reaper 3 years ago from southern USA

Hi Marlene,

Thanks for writing this insightful hub with such valuable information for all to know!

Long ago, I used to know about all of this, when I worked in the insurance industry, but I seemed to have forgotten much, so thank you for the great reminder here!

Up and more and sharing.

Blessings, Faith Reaper


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you so much, Bill. Your feedback means a lot. I get impatient, as you know, waiting for the big bucks to roll in. Normally, I'm amazingly laid back and patient, but I have some property in the Sierras that I desperately want to finish developing and thought the income from writing might be able to contribute toward that endeavor. But, now thanks to you (seriously, thanks to YOU), I'm back to being patient. Thanks, again for your comments.


billybuc profile image

billybuc 3 years ago from Olympia, WA

Good introduction....a conclusion that refers back to the intro...clear, concise information.....I declare this hub a winner!!!!!!!!!!

Oh, and you have a tagline at the end. This is well done, Marlene. Now be patient and understand that it takes about six months for a hub to circulate through the internet.

Have a great weekend.

bill

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