When applying for a mortgage, whether that’s for your first house or your next investment property, there are many confusing terms that will be thrown at you —PITI included.
I get it: PITI sounds confusing, even scary at first. That’s what I thought. But as you dig deeper into it, it’s quite simple.
PITI refers to principal, interest, taxes, and insurance, which are the four main components of a mortgage.
Here’s a detailed breakdown of what PITI is and how to calculate it, as well as why it’s so important for real estate investors.
Let’s dive in!
What is PITI?
First off: what is PITI?
PITI are the four key components of a mortgage.
These components combine to create your total monthly mortgage payment.
When budgeting for mortgage payments, you’ll need to make sure you can afford to pay all four components monthly.
Let’s take a look at each one in-depth next.
Principal
The principal is the original loan amount, broken down into monthly payments.
For example, if your loan is for $500,000 after your down payment, the principal is the repayment of that $500,000 before interest and other added costs.
Interest
All mortgages come with an interest rate. Lenders primarily make money through interest payments. Part of all monthly mortgage payments will include interest.
For example, if you have a $100,000 principal with 10 years remaining on your mortgage and a 3% interest rate, your monthly principal would be roughly $1666, with an interest payment of $50.
As a new homeowner, most of your mortgage payments will go toward your interest.
However, the interest portion of your payments will slowly go down as you pay off your principal. This is because interest is recalculated over time as your principal goes down.
Taxes
As a homeowner, you’ll be responsible for paying local property taxes. These taxes support local services such as roads, police and fire departments, schools, libraries, and more.
Instead of paying a large property tax bill annually or biannually, many homeowners opt to include it in their monthly mortgage payments. This can make your property tax bill much more manageable.
Insurance
In most cases, homeowners are required to take out private mortgage insurance (PMI) and home insurance as part of their loan. Home insurance protects you financially if your home is damaged as the result of a natural disaster, break-in, or other unanticipated event.
PMI protects the lender financially if you default on your payments. In both cases, these insurance costs can be added on to your monthly mortgage payments.
How To Calculate Your PITI Mortgage Payment in 4 Steps
Step 1: Calculate Your Principal and Interest
Your principal and interest are the basis of your mortgage payments, so you’ll want to calculate these costs first. You can do so using the following formula:
PI = P [ I(1 + I)N ] / [ (1 + I)N − 1]
PI = Monthly principal and interest
P = Principal
I = Monthly interest rate (Divide your annual interest rate by 12)
N = Total monthly payments (For example, a 20-year mortgage would have 240 monthly payments)
Enter this formula into a calculator to get your monthly principal and interest cost.
Step 2: Calculate Property Taxes
Property tax rates vary widely between states and even between cities. In some cities, property taxes can even vary between neighborhoods!
The easiest way to estimate your property taxes is to find a recent annual tax bill for your property. Then, divide the total tax levied by 12 to get your monthly property tax costs.
Step 3: Find Your Monthly Insurance Costs
Like property taxes, monthly insurance costs can vary by property and location. To calculate your monthly insurance cost, take the total cost of your yearly premium and divide it by 12. Be sure to include both homeowners insurance and PMI if you have both. If you haven’t yet taken out your insurance policies, many insurance providers have sites that will estimate the monthly cost for you.
Step 4: Add It Up
Add the cost of your monthly principal and interest, property tax cost, and insurance cost together to get your total PITI amount.
PITI Frequently Asked Questions
Q. What is the 28% PITI rule?
The 28% PITI rule is a requirement that many lenders have to ensure that borrowers can afford the loans they take out.
This rule specifies that your monthly PITI payments should be no more than 28% of your monthly gross income.
Q. Can my PITI fluctuate?
Yes, it’s possible for your PITI to fluctuate over time.
Property taxes are reassessed yearly and can change based on your property value.
You could also change your home insurance policy, resulting in a different rate.
Finally, your interest payments can change over time if you refinance your home.
Q. What can I do to lower my PITI?
If you feel like you’re spending too much on your monthly mortgage, there are things you can do to make the costs more manageable.
The easiest way to reduce your PITI is to refinance and get a lower interest rate.
This is an option if your credit score has improved since you initially took out your loan, or if interest rates have lowered in general since you made your purchase.
Another option is to look for more affordable homeowners’ insurance.
Get quotes from multiple providers to make sure you’re not paying more than you need to.
Finally, if you think your property taxes are too high, contact your local government for a reassessment.
The Bottom Line: PITI
Your monthly mortgage payment is more than just the principal.
Calculating your total PITI cost will help you understand exactly how much you’ll be paying each month for your property, so you can make smarter decisions when purchasing a new property.
Looking for other real estate formulas to help your real estate business? Check out our guides to Cap Rate, Loan to value ratio, Debt to equity ratio , PITI, Gross rent multiplier, Mao formula and other real estate acronyms.
