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.
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?
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.
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.
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.
The fourth and final component of PITI relates to insurance. Many lenders require you to purchase and maintain homeowner’s insurance to protect your property from damage. Homeowners insurance typically covers damage from natural disasters like hurricanes, tornados, and fires in addition to break-ins. The overall cost of your homeowners insurance policy will depend on your home’s value, location, age, condition, security, as well as your credit history. However, if you’re looking to get a rough idea of how much this will cost you to calculate an accurate PITI, you should expect to pay about $3.50 for every $1,000 of your home’s value on insurance each year. So for your $300,000 house, your homeowners insurance should cost about $1,050 a year or $87.50 a month.
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.
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:
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/