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Principal Interest Tax and Insurance - The Most Important Number a Buyer Needs to Know
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 is another word for home loan.
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.
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.
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.
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.
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
30 Year Mortgage
Home Value Price
RESULT: PITI Calculated
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 following video, What Makes Up a Mortgage Payment, is fun to watch. At the same time, it shows what PITI is in a way that is clear and memorable.
Now, when you sit down in front of the loan agent’s desk, you can ask confidently, “So, what’s my PITI?”
HUD is a government agency established to assure fair housing and strong communities for the home buying public.
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