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What Is PITI? How to Calculate PITI

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What Does PITI Stand for?

PITI is a common acronym in real estate. PITI stands for principal, interest, taxes, and insurance. These four costs come together to make up your mortgage payment. When a lender is qualifying a borrower for a home loan, they need to take into account what the borrower can afford each month using PITI, not just the principal amount.

The lender wants to make sure that the borrower can easily afford their monthly payments so that they do not default on their home loan. If the lender does not consider the other factors besides the principal of the loan, the borrower might not be able to afford the payments. PITI is usually quoted monthly.

The P in PITI stands for principal, which refers to the principal amount of the loan. If you take out a $400,000 home loan, that $400,000 is your principal. Often, the principal that you pay on your home starts out low and gets higher over time.

The I in PITI stands for the interest on your loan. At the beginning of your home loan, you will pay mostly interest. If you have a fixed rate loan, your interest rate will stay constant. If you have a 5% interest rate on a $400,000 loan, you will pay $20,000 in interest over the life of your loan.

The T in PITI stands for taxes, everyone’s favorite! Taxes vary depending on where your home is located. Property taxes are calculated annually, and your lender includes them as a part of your monthly mortgage payment.

Finally, the second I in PITI stands for insurance. If you pay less than 20% of the home’s value as your down payment, you will need to pay private mortgage insurance, or PMI. You might also need to pay for homeowner’s insurance if it is not included in your HOA costs.

How to Calculate PITI

PITI is a simple addition for a lender. They add up the principal amount and interest amount you must pay every month and add that to the taxes and interest you owe to give you your mortgage amount.

Conclusion

PITI is an acronym for principal, interest, taxes, and insurance. A lender uses PITI to qualify a borrower for a specific loan amount for a mortgage. A lender always wants to make sure that a borrower does not take out a loan for more than they can afford, so it is important to take all of PITI into account when qualifying.