Most prospective home buyers know that a mortgage is a long-term loan secured to purchase a home, but do you know what factors play a role in the calculation of a mortgage payment? If the answer is “no”, let us introduce you to Principal, Interest, Taxes and Insurance better known as PITI. Collectively, PITI are what make up your monthly mortgage payment, but let us take a moment to look at them individually.
The principal is the amount of money you borrow, or your loan amount. The principal portion of your monthly mortgage payment is the amount applied to the loan that pays down your outstanding loan balance.
Interest is the cost of borrowing money. Two factors determine the amount of interest you pay, your interest rate and your loan amount.
Property taxes are assessed by your local government and are calculated on a per-year basis. Your estimated annual tax due is divided by the number of payments you will make in a year, and that monthly amount is included in your mortgage payment. Your lender holds these payments in escrow until the taxes are due to be paid.
You are required to carry hazard insurance, often referred to as homeowner’s insurance, on the home you finance. Homeowner’s insurance protects your home and its contents from things such as theft, fire and other hazards. Depending on your geographic location, you may be required to secure additional flood insurance. Like your property taxes, your estimated annual insurance due is divided by the number of payments you will make in a year, and that monthly amount is included in your mortgage payment. Your lender holds these payments in escrow until the insurance is due to be paid.
With certain types of financing, you may be required to pay Private Mortgage Insurance (PMI). PMI is provided by private mortgage insurance companies to protect your lender in the event you default on your loan by insuring a percentage of your property’s value. Factors that may affect PMI are the type of mortgage and your down payment.
Below are two examples of a monthly mortgage payment on a Conventional, 30-year Fixed Loan. In Example 1, PMI is not required due to the amount of the down payment. In Example 2, PMI is required due to a down payment of less than 20%. These examples are for illustrative purposes only.