When you are thinking about buying a new home, one of the first things you probably do is calculate how much you can afford based on your current income. During that search you may come across the term “PITI”, and as you’re calculating those monthly costs for your new home, it’s important to understand what this term means so you can figure out costs accurately.
PITI stands for principal, interest, taxes, and insurance, and is a holistic calculation of what your total monthly payments will be for a new home. We’ll break down the basics of each part.
Principal and Interest
Basic mortgage payments include two things: principal and interest. These two numbers are calculated using the total amount you plan to borrow, your interest rate, and how long you plan to take to pay it off. This determines how much you will owe each month to the lender. For fixed-rate loans, your monthly payments won’t change but you will pay more toward interest at the beginning of your loan, then as you pay down the principal, the percentage of monthly payment that goes toward interest will decline.
You can see how much you are paying toward principal and interest each month for the entire life of the loan by looking at your amortization schedule.
You will also owe property taxes, which are determined by the local area where you plan to move. Taxes are calculated as a percent of your home’s value, and can vary from year to year if they go up or down, or if the county tax assessor determines that the value of your home has increased. You can look up local property tax rates, or get a rough estimate by calculating about $1 in taxes for every $1,000 of home value per month (so a $300,000 home would be about $300 in taxes).
Most lenders require that you pay for property insurance as part of your loan, in case the home is damaged by fire, weather, a break-in, etc. There may also be specific requirements to protect against things like earthquake or flooding, depending on where you live. You can get a quote from an insurance company to determine what your monthly cost will be for this.
Why PITI Matters
While you can look at just the principal and interest for your loan, that doesn’t give you the whole picture of what you will owe. Failing to take the extra costs of taxes and insurance into account could lead to financial strain later if your monthly budget is maxed out before taxes and insurance, which you still have to pay. It can also impact how much you will be able to borrow; for example, if you are buying in an area with high property taxes, you may not be able to borrow as much because the total PITI payment will be too high.
Integrity First Lending can help answer all your questions about PITI and monthly costs for a mortgage. Contact us today to find out more.