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Aug 2017

What is PITI? Your Mortgage Payment Breakdown

Taking out a mortgage loan is a huge financial investment, and sometimes the ins and outs of the process are hard to understand. You may have done calculations to determine how much mortgage you’re able to afford, but did you know your monthly payment includes more than just the price of your home? Your PITI is the total amount of what you’ll owe every month. Let’s break it down.

What is PITI?

Principal, interest, taxes, and insurance (PITI) are the parts of your monthly mortgage loan payment. It’s important to understand each element so you know what you’re paying for.


Principal is the amount of the sale price of your home, minus the amount of your down payment. When you make your mortgage payment each month, part of your payment goes toward paying down your principal. Principal is pretty straight forward: when you pay off your principal, you gradually reduce the balance you owe on your loan. In doing so, you increase the equity in your home, which is the portion of your house that you own. In most cases, for the first few months of mortgage payments, only a small amount of your payment will actually go toward paying down your principal. However, the amount of your payment that goes toward the principal increases through the life of your loan. Let’s say you purchased your home for $150,000 and you put 5% down, which would be $7,500. That would make the principal on your mortgage $142,500.


Your lender charges you interest for borrowing money from them. Your interest is a percentage of the principal you still owe back. In the early life of your loan, a large part of your monthly mortgage payment goes toward paying off your interest. Your interest rates may stay the same throughout the life of your loan, like with a fixed-rate mortgage, but it can also fluctuate, like with an adjustable-rate mortgage.


For most mortgage loans, taxes will be rolled into your monthly mortgage payment. Property taxes, also known as real estate taxes, are charged for real estate property, like the house or building on the property, or even the land itself. These taxes are determined by local government officials in your area and fund local public services including schools, construction, and emergency services.

Typically, your total annual taxes are divided into 12 payments. This way, you pay your property taxes in even installments each month instead of one lump sum.

When you make your monthly payment, your lender holds the tax payments in an escrow account until they’re due, at which point they pay them from that account. Some lenders require a little extra money every month in case you come up short when taxes are due. Don’t worry, you’ll get any extra money refunded after your taxes are paid. It may seem odd that you wouldn’t just pay your taxes on your own. Why involve your lender? By including property tax in your mortgage payment, the lender protects themselves. If you’re forced to foreclose on your home, your lender is likely to get stuck with paying the remaining property taxes. By already having money in your escrow account for taxes purposes, the lender isn’t stuck with the entire sum of your taxes. Bonus — it’s one less bill you have to think about each month. Your taxes vary depending on the area you live in, so make sure you consider the local tax rates when you’re shopping for a new home.


The final part of your monthly mortgage payment is insurance. There are three different kinds of insurance that protect both you and your lender from potential losses. Like taxes, your insurance payments are usually collected each month and sometimes held in escrow until they’re due. Insurance varies depending on your loan type, so make sure you talk with your lender and understand what you’ll be required to pay for.

Private mortgage insurance (PMI)

PMI protects the lender incase you’re unable to repay your loan. Your PMI rates depend on how much of a down payment you made and your credit score. PMI is mandatory if you put less than 20% down on your mortgage loan. If you’re required to purchase PMI (and a lot of borrowers are), it can often be dropped once you have at least 20% equity in your home. There are two main types of PMI: borrower-paid and lender-paid, and they are exactly what they sound like. With borrower-paid mortgage insurance, you pay your lender, who turns around and pays the insurance company. If you have lender-paid mortgage insurance, your lender pays your mortgage insurance and the cost is usually built into your monthly payment.

Homeowners insurance

Homeowners insurance typically protects your property in case of fire, damage, or theft. All lenders require that you purchase homeowner’s insurance so your home and their investment is protected. Most of the time, you’re required to have coverage at least equal to the value of your home.

Flood insurance

Flood insurance isn’t necessary for all properties but may be required depending on whether or not your home is in a flood zone. Are you buying a water front home? Expect to pay flood insurance. Damage or loss of property from flooding is not typically covered under homeowner’s insurance, so make sure you check on this if your property requires flood insurance. Don’t be afraid to ask your mortgage lender about the different components of your PITI. What will your principal be if you put 10% down? Will you be required to purchase flood insurance for your property? Buying a home is a big financial decision, so it’s important to know where your money is going.