:max_bytes(150000):strip_icc()/walkingawayfrommortgage-bb93ca1a0c974263bcf4071484de2893.jpg)
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Chris B. Murphy is an editor and financial writer with more than 15 years of experience covering banking and the financial markets.
Updated June 05, 2024 Reviewed by Reviewed by Thomas BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
Fact checked by Fact checked by Katharine BeerKatharine Beer is a writer, editor, and archivist based in New York. She has a broad range of experience in research and writing, having covered subjects as diverse as the history of New York City's community gardens and Beyonce's 2018 Coachella performance.
Principal, interest, taxes, and insurance (PITI) are the components of a mortgage payment. Specifically, they are the principal amount, loan interest, property tax, homeowners insurance, and private mortgage insurance premiums.
Understanding how each component of principal, interest, taxes, and insurance impacts your monthly mortgage payment is essential in determining the affordability of a home.
The principal and interest on your loan usually make up the majority of your mortgage payment. Mortgage lenders may require borrowers to buy homeowners insurance to protect the property from damage. You may also need to pay property taxes, depending on the state in which the home is located.
Together, the principal, interest, taxes, and insurance represent the monthly cost of buying a home. Mortgage lenders use PITI to calculate various financial ratios and the total housing expense to determine whether or not to lend you the money to buy a home. Let's review the four components of PITI.
A portion of each mortgage payment is dedicated to repayment of the principal—the original amount borrowed. For example, if you take out a $100,000 mortgage loan, the principal is $100,000. Typically, only a small portion of your monthly mortgage payment goes to paying down the principal in the early years of the loan.
Interest is the price you pay for borrowing money and the mortgage lender’s reward for taking on the risk of lending to you. In the early years of a fixed-rate mortgage loan, a greater portion of the monthly payment goes towards paying interest rather than the principal. The ratio gradually shifts as time goes by.
For example, if the interest rate on our $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year fixed-rate loan would be $599.55. The first monthly payment would have $500 applied to interest and $99.55 to principal.
Over the life of the loan, the amount of the payment applied towards interest and principal changes. The table below shows a truncated payment schedule of a $100,000 mortgage loan at a fixed rate of 6% for 30 years.
| Principal & Interest Breakdown of $599.55 Mortgage Payment | |||
|---|---|---|---|
| Payment # | Principal | Interest | Principal Balance |
| 1 | $99.55 | $500 | $99,900.45 |
| 12 | $105.16 | $494.39 | $98,772.00 |
| 180 | $243.09 | $356.46 | $71,048.96 |
| 223 | $301.24 | $298.31 | $59,361.51 |
| 360 | $597.00 | $2.99 | $0 |
From the table above, we can see that most of each monthly payment went to interest in the early years. By 180 months or 15 years (the halfway point), another $144 was being applied to the principal instead of interest—but the interest still made up more than half of the payment.
However, by the 223rd month or approximately 18.5 years, the proportion switched, with more of the payment applied to principal rather than interest. By the end of the loan, very little was allocated to interest, with most of the payment going to the principal.
Real estate or property taxes are assessed by local governments and used to fund public services such as schools, police forces, and fire departments. Taxes are calculated on a per-year basis, but you can include them as part of your monthly mortgage payments.
The amount of taxes due is divided by the total number of mortgage payments in a given year. The lender collects the payments and holds them in escrow until the taxes are due.
Like real estate taxes, insurance premiums can be paid with each mortgage installment and held in escrow until the bill is due. There are two types of insurance coverage that may be included. Homeowners insurance protects the home and its contents from fire, theft, and other disasters.
Private mortgage insurance (PMI) protects the lender in case the borrower defaults on the payments. It is mandatory if your down payment is less than 20% of the home's value.
Mortgages backed by the Federal Housing Administration (FHA), sometimes called FHA loans, include a mortgage insurance premium (MIP). It is similar to private mortgage insurance but requires a large upfront payment, along with monthly payments.
Principal, interest, taxes, and insurance (PITI) are typically quoted on a monthly basis and compared to a borrower's monthly gross income to help the buyer and the lender determine the affordability of an individual mortgage.
Because PITI represents the total monthly payment the borrower will need to make, a lender will look at an applicant's PITI to determine if they represent a good risk for a home loan. Buyers may also calculate their PITI to determine if they can afford to buy a particular home.
The housing expense ratio measures how much of your monthly gross income—your income before taxes are deducted—goes to paying your total housing costs. In short, the housing expense ratio (also called the front-end ratio) compares PITI to your gross monthly income.
Most lenders prefer a housing expense ratio of 31% or less. However, some lenders may allow up to 40%.
For example, say a borrower has a PITI totaling $2,000 broken down as follows:
If the borrower has $6,500 in gross monthly income, their housing expense ratio equals 31% ($2,000 / $6,500).
The debt-to-income ratio (DTI) compares PITI and other monthly debt obligations to gross monthly income. Also known as the back-end ratio, most lenders prefer a DTI of 36% or less. However, for FHA-insured loans, some borrowers may qualify with a DTI as high as 43%.
Suppose the borrower above has two other non-mortgage monthly obligations, for a total of $2,350:
The borrower's DTI is 36% ($2,350 / $6,500).
Some lenders also use PITI to calculate reserve requirements for a borrower. Typically, there is no minimum reserve requirement for all lenders. However, some lenders may require reserves to secure mortgage payments in the event a borrower suffers an income loss. Often, lenders quote reserve requirements as a multiple of PITI. For example, two months of PITI might represent a reserve requirement.
In addition to savings, monitor your credit score, which is a three-digit number representing your creditworthiness based on your credit history. Borrowers with cash reserves and a credit score higher than 580 have less stringent qualifications, such as a 47% debt-to-income ratio and a 37% total housing expense ratio.
Not all mortgage payments include taxes and insurance. Some lenders do not require borrowers to escrow these costs as part of their monthly mortgage payments. In these scenarios, the homeowner pays insurance premiums directly to the insurance company and property taxes directly to the tax assessor. The homeowner's mortgage payment, then, consists of only principal and interest.
Still, even if not escrowed, most lenders still consider the amounts of property taxes and insurance premiums when calculating front-end and back-end ratios. Moreover, additional mortgage-related monthly obligations, such as homeowners association (HOA) fees, may be included in PITI to calculate debt ratios.
It depends. Some mortgage payments don't include taxes and insurance. In this case, the homeowner pays insurance premiums directly to the insurance company and property taxes directly to the tax assessor.
The term "PITI" is an acronym for principal, interest, taxes, and insurance—all of the standard components of a mortgage payment. Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage.
Your principal is the money that you originally agreed to pay back. Interest is the cost of borrowing the principal. For example, if the interest rate on a $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be about $599.55—$500 interest + $99.55 principal for the first payment. Over time, the amount of the payment stays the same, but the proportions change so that eventually, more of the payment goes toward the principal and less toward interest.
The front-end ratio compares PITI to gross monthly income. Most lenders prefer a front-end ratio of 31% or less, though a few will allow a ratio as high as 40%. For example, the front-end ratio of a PITI totaling $1,500 to a gross monthly income of $6,000 is 25%.
PITI, or principal, interest, taxes, and insurance, refers to all of the standard components of a mortgage payment. Because PITI contains everything that homeowners will typically have to pay toward their mortgage every month, it is a useful way of working out whether a person can afford a mortgage.
To make that calculation, a borrower's PITI is compared to their monthly gross income. Generally, mortgage lenders prefer a PITI of 31% or less of a borrower's gross monthly income since it indicates they are more likely to be able to afford the mortgage loan.
Article SourcesPre-foreclosure refers to the early stage of a property being repossessed due to the property owner’s mortgage default.
An owner-occupant is a resident of a property who also holds the title to that property.An absolute auction is a type of auction where the sale is awarded to the highest bidder. Absolute auctions do not have a reserve price, which sets a minimum required bid for the item to be sold.
Reverse mortgage counseling is required for home equity conversion mortgages. Learn how reverse mortgage counseling works.
Other Real Estate Owned is a bank accounting term that refers to real estate owned by a bank that is not directly related to the bank’s business.
Regulation Z is a U.S. Federal Reserve regulation synonymous with the Truth in Lending Act and includes protections for consumer borrowers.
Related Articles
:max_bytes(150000):strip_icc()/options-lrg-3-5bfc2b2046e0fb005144ca9d.jpg)
:max_bytes(150000):strip_icc()/StopForeclosure-56bd2f2c3df78c0b13803f27.jpg)
:max_bytes(150000):strip_icc()/foreclosure-for-sale-sign-in-front-of-house-157328426-952fd9c5c55449ad9e8cb479f72780a6.jpg)
:max_bytes(150000):strip_icc()/thinkstockphotos-178461378-5bfc3526c9e77c005878d646.jpg)
:max_bytes(150000):strip_icc()/INV_HomeownerExpensesvsRenting_GettyImages-77805457-cbae3b4b1702412d818d8de17a5f71a0.jpg)
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)
