Mortage PITI – Principle, Interest, Taxes and Insurance – Not a PITI party…

The acronym PITI stands for Principal, Interest, Taxes, and Insurance, which are the four components that make up a borrower’s monthly mortgage payment. Understanding PITI helps borrowers budget for the total cost of homeownership, including not only the loan repayment but also ongoing property taxes and insurance. It ensures that homeowners are financially prepared for all aspects of maintaining and enjoying their property.  Here’s a breakdown of PITI:

1. Principal:
   • Definition: The principal is the amount of money borrowed to purchase the home. It represents the initial loan amount.
   • Role: As borrowers make monthly mortgage payments, a portion goes towards repaying the principal. Over time, this reduces the outstanding loan balance.
2. Interest:
   • Definition: Interest is the cost of borrowing money, expressed as a percentage of the loan amount. It is the compensation paid to the lender for providing the funds.
   • Role: A significant part of the early mortgage payments goes toward paying interest. Over the life of the loan, the balance between principal and interest payments shifts, with a larger portion going toward principal in later years.
3. Taxes:
   • Definition: Property taxes are levied by local governments based on the assessed value of the property. These taxes fund local services such as schools, infrastructure, and public services.
   • Role: Lenders often collect property taxes monthly and hold them in an escrow account. When property taxes are due, the lender pays them on behalf of the homeowner, ensuring that taxes are current and the property is not at risk of liens or foreclosure.
4. Insurance:
   • Definition: Homeowners insurance protects the property and its contents from various risks, such as fire, theft, or natural disasters.
   • Role: Similar to property taxes, homeowners insurance payments are often collected monthly and held in an escrow account. The lender pays the insurance premiums when they are due, ensuring continuous coverage and protecting the lender’s interest in the property.

In summary, PITI encompasses all the essential components of a mortgage payment:

• Principal: The amount borrowed for the home.
• Interest: The cost of borrowing money.
• Taxes: Property taxes supporting local services.
• Insurance: Homeowners insurance protecting the property.