When you apply for a mortgage, a lender will calculate your PITI. That’s an acronym that stands for principal, interest, taxes and insurance. It represents the total amount that you’ll have to pay when you make your monthly housing payments.
What Does PITI Include?
PITI includes the principal on your mortgage, which is the amount you borrowed; interest on the loan; property taxes, which your local government collects to pay for schools, police and fire departments, road maintenance and other essential services; and insurance.
The insurance portion of PITI includes your homeowners insurance premiums, as well as the cost of private mortgage insurance, if you have it. PMI will protect the lender if you default on your loan. You’ll be required to obtain PMI if you put down less than 20% of the purchase price.
When you make a mortgage payment, the portion that covers principal and interest will go to your lender. The amounts that are devoted to property taxes and insurance will be put into an escrow account and paid to your local government and insurance company when the bills are due.
Why Do Lenders Calculate PITI?
A mortgage lender calculates the ratio of PITI to an applicant’s gross income. Based on that ratio, the lender decides whether to approve a mortgage application and, if so, how large a loan to give the borrower.
Lenders also consider an applicant’s debt-to-income ratio. That includes housing costs, plus other monthly obligations, such as auto and student loans and credit card payments.
Your lender might require you to have mortgage reserves. Those are assets that you’ll need to have easy access to so you can cover your housing costs if you suffer a financial setback.
Lenders often use PITI to figure out how much a borrower should have in mortgage reserves. For example, your lender might require you to have two times your PITI in reserves before it approves your loan request.
How Can PITI Help You?
Homebuyers often think about the cost of a house in terms of principal and interest but don’t account for other expenses, such as taxes and insurance. PITI can be helpful to buyers because it more accurately reflects the true cost of ownership.
Before you buy a new home, you need to look at the big picture. When you take principal, interest, taxes and insurance into account, you and your real estate agent will be able to save time by focusing on properties that fit your budget.