# PITI Definition | Principal, Interest, Taxes, Insurance -- Mortgages Explained

The number one question people have when buying a home is, “Can I really afford it?” Thanks to PITI, figuring out the general cost of purchasing and maintaining a home is easier than ever. Stay tuned to learn how you can calculate these factors and determine how much house you can realistically afford.

### What Is PITI Used for?

A calculation of the principal, interest, taxes, and insurance is used when applying for a mortgage loan to determine affordability. Otherwise known as PITI, these different components can give a complete picture of all the costs associated with a mortgage and homeownership without leaving anything out. On the front end, lenders compare PITI to your gross monthly income. This ratio should ideally be 28% or less, with few lenders allowing borrowers to exceed 30%. This means that if you have a gross monthly income of \$8,000, your PITI should be less than \$2,240. On the back end, lenders calculate your debt-to-income ratio (DTI) and compare this cost with PITI. This ratio should ideally be 36% or less. This means that if you have a student loan payment of \$200, a car payment of \$200, and a credit card payment of \$100, this debt would be combined with your PITI amount of \$2,240 for a total of \$2,740. This DTI and PITI combination would put you at 34.25% of your gross monthly income, meaning that you still qualify for the loan based on your debts. But what do the components of PITI actually mean, and how are they determined?

### Principal

The first component of PITI relates to your principal, or the total amount of your loan without including interest. For example, say the purchase price of your home is \$300,000, but you put down the recommended 20%, or \$60,000. This leaves you with a loan or principal amount of \$240,000. When you first begin paying off your loan, most of your payments will be going towards interest so that you won’t be making much progress in terms of actual equity in your home. Over time, however, you’re able to pay off much of that interest and really start paying into the principal of your mortgage loan.

### Interest

The second component of PITI relates to your interest rate or the price that your lender is charging you for borrowing their money. Interest rates vary greatly depending on the lender, type of loan, and overall credit score. Overall, lenders grant lower interest rates to lower-risk candidates. So if you want a low-interest rate, you need to make sure that you’re a low risk to the lender by building up your credit score, saving up money for a down payment , and paying off any debts to minimize your DTI ratio. Interest rates could end up costing you a lot over the lifetime of your loan, so it’s important to shop around for a low rate. Right now, interest rates are quite low, averaging just over 3% for a 30-year fixed-rate loan. However, you can always look into refinancing if you want a lower interest rate.

### Taxes

The third component of PITI relates to your taxes, or the amount that you pay in property taxes on an annual basis. Although your property taxes are only due once a year, many lenders allow you to pay into this cost monthly to lessen the burden through an escrow account. Then, come tax time, you can use the money in your escrow account to cover the cost of your property taxes. Property taxes can be difficult to calculate since they vary a lot by the location and value of your home. However, as a general rule, you should expect to pay about \$1 for every \$1,000 of your home’s value each month as a part of property taxes. So for your \$300,000 home, you should set aside \$300 a month for property taxes that would end up being around \$3,600 a year.

### How to Calculate PITI

Using everything that we’ve covered so far, it’s finally time to calculate your PITI. Let’s keep the numbers the same for the sake of simplicity.

• Starting off with your \$300,000 home and a \$240,000 loan after a \$60,000 (or 20%) down payment, we add the interest. Let’s say that you have a decent credit score, and you receive the current average mortgage interest rate of 3.1% for a 30-year fixed-term loan. Based on these numbers, you will end up paying \$128,942 over the course of your loan for a total of \$368,942. As a result, your monthly payment with principal and interest will be \$1,024.84.
• Moving on to taxes, you should expect to pay \$300 a month. As a result, your monthly payment with principal, interest, and taxes is \$1,324.84.
• Finally, with insurance, you should expect to pay \$87.50 a month. As a result, your monthly payment with all the components of PITI equals \$1,412.34.

### Other Mortgage Terms You Need to Know

While knowing all about PITI will undoubtedly help you through your mortgage process, there are tons of other terms out there that may leave you scratching your head. We here at Seek Capital never want to leave you feeling uninformed or unprepared, so here’s a rundown on some of the other mortgage terms you need to know about before you sign on the dotted line:

• Annual Percentage Rate (APR): The interest rate of your loan plus any additional lender fees that are paid over the lifetime of the loan.
• Appraisal: An assessment of the property to see how much it’s worth and ensure that you’re not borrowing more than it’s actually worth.
• Closing costs: The fees and costs associated with applying and then finalizing a mortgage loan application with your lender. Some specific costs to expect include appraisal fees, title fees, inspection fees, and loan origination fees. You should expect closing costs to be about 2 to 5% of the total cost of your loan.
• Debt-to-income (DTI) ratio: Takes your recurring monthly debts divided by your total monthly gross household income to determine how much money you can spend on a mortgage payment. Having a DTI of less than 50% is ideal, and the lower the better.
• Down payment: The first payment you make on your mortgage loan -- typically a larger number than your monthly payment to decrease the overall loan amount as well as your monthly payments. Traditionally, it’s recommended that you put down 20% of the purchase price of the home; however, there are options out there that allow you to put down as little as 3%.
• Escrow: A separate account with your lender that allows you to spread out your payments for property taxes or homeowners insurance that otherwise would have to be paid all at once.
• Home inspection: Determines whether or not there are any specific problems with your home that you need to know about before buying.
• Preapproval: A step that you typically take early on in the buying process to determine how much house you can realistically afford. You apply for preapproval with a lender by providing them documentation such as pay stubs, W-2s, bank statements, and more.
• Refinance : Involves taking out a new loan on your existing home that pays off the old loan and often gives you a lower interest rate and monthly payment as a result.
• Term: The number of years you have to pay on your loan before it’s fully paid off and you achieve full ownership of your property.
• Title: Proof that you own your home and includes a property description, property owners, and any liens on the property.

### Wrap Up

Determining PITI is a key part of the mortgage process. However, don’t let all these complex calculations deter you! A great lender like Seek Capital should be there to help you figure out all these intricacies and answer all your questions along the way. Sources: https://www.forbes.com/advisor/mortgages/mortgage-terms-what-you-need-to-know/ https://www.consumerreports.org/home-inspections/how-to-choose-a-home-inspector/ https://www.cnbc.com/select/pros-and-cons-of-refinancing-home/

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