PITI

PITI is short for 'principal, interest, taxes, and insurance'. It represents the components of a home buyer's monthly expenses. To determine total monthly payments, the cost of each component is calculated and aggregated. Therefore, in determining their budget, home buyers determine PITI.

Borrowers compare monthly loan repayments with their gross monthly income and determine if they have a healthy debt-to-income ratio (DTI). Initially, monthly repayments comprised mainly of interests. Near the end of the loan tenure, most of the loan repayment covers the loan principal. Lenders sanction mortgages if the monthly payment exceeds 28% of the gross monthly income.

• PITI is an abbreviation for 'principal, interest, taxes, and insurance.' It represents the components of a home buyer's monthly expenses after purchasing.
• The lender collects a monthly fee from the borrower for tax and insurance. This amount is put into escrow. By the end of the year, the lender pays taxes and insurance on behalf of the mortgage borrower.
• If M = total monthly payments, P = the total amount of loan, i = interest rate, and n = the number of monthly payments, then the total monthly mortgage payment is expressed as follows:
  Monthly Payment = P / .

PITI real estate calculations comprise the principal, interest, taxes, and insurance. In addition, it gives an idea about monthly mortgage repayments. Before signing a mortgage agreement, loan applicants must evaluate if they can afford the property.

Let us look at PITI components in detail:

#1 - The Principal

The loaned amount is referred to as the principal. Monthly repayments cover the principal—gradually, the pending principal repayment diminishes. When it comes to a long-term mortgage, or a 30-year loan tenure, the principal portion of PITI is quite small. That is, a large percentage of the initial repayment covers the interest. Close to the expiry date, much of the repayment cover the principal.

#2 - Interest

Lenders charge interest on the loaned amount (principal). Determining loan interest is a complex process; it depends on the loan type, property type, location, downpayment, prevailing market conditions, and credit scores.

There are two types of interest rates: fixed interest rate and adjustable interest rate. On fixed-rate loans, the interest rate does not change. In adjustable-rate mortgages (ARM), the interest and market conditions fluctuate.

#3 - Tax

State governments impose taxes on most purchases (including real estate acquisitions). In most cases, lenders charge an additional sum to clear annual taxes.

But taxation law varies, depending on the particular jurisdiction. For example, the tax burden is higher when an individual purchases in a high-value real estate market. An impound account (an escrow account) holds tax payments while individuals settle obligations.

#4 - Insurance

To get a loan sanctioned, the borrowers must acquire homeowners' insurance. That is, the collateralized property is insured. In the event the house gets damaged, the lender is protected.

Usually, monthly mortgage payments include the cost of insurance. The lender holds taxes and insurance premiums in an escrow. Later, the lender pays insurance on the borrower's behalf.

Now let us discuss how to calculate PITI.

To determine the payment amount, the PITI formula is used:

PITI = P /

To calculate principal, interest, taxes, and insurance, follow these steps:

1. First, determine the mortgage principal. Next, subtract the down payment from the purchase price. Here, P denotes the principal. 
2. Then calculate the monthly interest rate. We divide the annual interest rate by 12. In the formula, i denotes interest. 
3. Then, we determine the number of payments needed to repay the loan. This value can be determined by multiplying the loan term number by 12. In the formula, n denotes the number of payments. 
4. Then we calculate monthly mortgage payments using the formula:
   PITI = P /
5. After that, we calculate property taxes.
6. For the penultimate step, we determine insurance payments.  
7. Finally, we aggregate all the payments mentioned above.

Let us look at PITI examples.

Example #1

Let us assume that Zachariah acquired a loan of $200,000. The loan had a tenure of 15 years, and the lender charged a 5% interest rate.

By the local laws, Zachariah is liable to pay $500 in taxes. Similarly, insurance costs $1500.

Before signing the loan agreement, Zachariah used a principal, interest, taxes, and insurance calculator. As a result, he determined that he would have to pay $1748 monthly (throughout the loan tenure).

Example #2 

Jeremiah used a principal, interest, taxes, and insurance calculator to determine monthly loan repayments.

The purchase amount was $500,000. Jeremiah paid a 10% down payment—of $50000. To determine the loan principal, this $50000 must be subtracted from $500000. Thus, the loan principal is $450000.

Then, he calculated the monthly interest rate. Annually he pays a 5% interest, that is, a 5% interest over 12 months. Therefore, he divided 0.05 by 12 and got a monthly interest of 0.0416660 (approximately 0.42%).

Then, Jeremiah determines the total number of payments. The loan term is 20 years.
20 * 12 = 240; he makes 240 monthly payments to complete loan repayment. In addition, he pays $60 in insurance and $200 in taxes.

Now we apply the given values to the formula:

• PITI = P /
• PITI = 450000 (0.42 (1+0.42*240)/ (1+0.42*240-1)

And adding insurance and taxes in the end, we get the following:

• PITI Payment = 450000 (0.42 (1+0.42*240)/ (1+0.42*240-1) + $200 + $60
• PITI Payment = 2991

Thus Jeremiah has to pay $2991 every month.

This article has been a guide to PITI and its meaning. Here we explain the topic with how to calculate it, its examples, and its components. You can learn more about it from the following articles -

• Principal Payment
• Interest Tax Shield
• Effective Interest Rate