What Is Principal, Interest, Taxes and Insurance (PITI)?

What Does PITI Stand For?

Your monthly mortgage payment is a single figure that you’re required to pay each month, and if you use an escrow account, that amount is broken into four components: principal, interest, taxes and insurance. Here’s what you need to know about each one.

Principal

The principal balance of your loan is the amount you borrow from the mortgage lender to buy a home. On a monthly basis, the principal portion of your payment goes toward paying down the loan.

For example, if you purchase a home for $250,000 and put down 20% (or $50,000), your total principal amount is $200,000. If you get approved for a 30-year loan with a 6% interest rate, your monthly payment (excluding taxes and insurance for now) would be roughly $1,199, which includes both principal and interest.

With your first monthly payment, only $199 will go toward your principal balance, with the rest covering accrued interest. Roughly halfway through year 18, however, you’ll start paying more toward principal than interest.

Interest

Interest is the amount a lender charges for the opportunity to borrow money. With that said, there are a few terms you’ll want to understand when it comes to mortgage interest:

• Interest rate: This is the annualized percentage the lender uses to determine how much interest you owe on the loan for each monthly payment.
• Annual percentage rate (APR): An APR is an annualized rate that incorporates both interest and certain fees, giving you a better idea of your total cost of borrowing. Mortgage companies are required by law to disclose the loan’s APR in addition to the interest rate.
• Fixed rate: The most common type of home loan, a fixed-rate mortgage keeps the interest rate the same for the life of the loan.
• Adjustable rate: With an adjustable-rate mortgage, you’ll get an introductory fixed rate for anywhere from three to 10 years, after which it can fluctuate based on market conditions.

It’s important to note that mortgage interest may be deducted from your income on your tax return. Depending on when you purchased your home and how you file your tax return, you may be able to deduct interest on up to $1 million in mortgage debt each year.

That said, you’ll need to itemize your deductions to enjoy the tax break, which may not make sense if your standard deduction exceeds your total itemized deductions.

How Much Are Interest Costs?

You can calculate how much interest you owe each month by dividing the annual interest rate by 12, and then multiplying that amount by the current principal amount.

Returning to the previous example of a loan with a 6% interest rate, you’ll divide 0.06 by 12, giving you a monthly rate of 0.005. Multiply that by $200,000, and you’ll see that $1,000 of your first monthly payment goes toward accrued interest, and the remaining $199 pays down your loan balance.

For the second month, your principal balance is now $199,801. Multiply that by 0.005 to get an interest payment of $999, and so on.

Taxes

Property taxes are usually due on an annual basis (sometimes broken into two installments), but many mortgage lenders break the payment down monthly and include it in your regular mortgage payment. This portion of your monthly payment is set aside in an escrow account, which the lender will use to pay your tax bill on your behalf.

That said, some lenders allow you to pay property taxes on your own without an escrow account. Local property taxes are tax deductible on your federal income tax return.

How Much Are Property Taxes?

Property taxes vary by state and county and can change each year. You can get an idea, however, based on the state you live in.

For example, according to the Tax Foundation, New Jersey has the highest property taxes in the country with a 2.08% average in 2022. In contrast, Hawaii has the lowest property taxes in the U.S. with a 0.26% average.

To get an idea of what your exact property tax rate is, contact your county’s tax assessor.

Insurance

Depending on your loan type and down payment amount, you could pay two different types of insurance with your monthly bill:

• Homeowners insurance: Homeowners insurance is designed to cover your home’s structure and your personal belongings if they’re damaged or destroyed by an eligible loss. It can also protect you against liability issues, such as someone getting injured on your property.
• Mortgage insurance: Mortgage insurance provides protection to the lender in the event that you stop making your payments. Rules and requirements for mortgage insurance will vary depending on the type of loan you have.

How Much Are Insurance Costs?

The cost of homeowners insurance can vary depending on where you live, the condition of your home and other factors. The average annual premium nationwide is $1,411, according to the National Association of Insurance Commissioners. However, that amount varies greatly from one coast to the other.

With mortgage insurance, on the other hand, the cost may depend on the type of loan you have and other factors.

• Conventional loan: Private mortgage insurance (PMI) typically costs between 0.2% and 2% of your loan amount each year. You’ll typically be required to pay for PMI if you put less than 20% down on your loan, but you can ask that it be removed once you reach that threshold—and it is typically automatically removed once you hit 22% equity.
• Federal Housing Authority (FHA) loan: You’ll need to pay an upfront mortgage insurance premium (MIP) equal to 1.75% of your loan amount on FHA loans. After that, you’ll pay an annual MIP ranging from 0.45% to 1.05% of the loan amount. If you put down 10% or more, the MIP will go away after 11 years. Otherwise, it’ll remain for the life of the loan.
• U.S. Department of Agriculture (USDA) loan: You’ll pay an upfront guarantee fee equal to 1% of your loan amount, then an annual guarantee fee of 0.35% of your loan balance on a USDA loan. There’s no option to get rid of it.
• Veterans Affairs (VA) loan: VA loans don’t require mortgage insurance. Instead, you’ll pay an upfront funding fee that ranges from 1.25% to 3.3% of your loan amount based on your down payment and how many VA loans you’ve received.

How to Calculate Your PITI

To evaluate how much house you can afford, you’ll want to include all four components of a mortgage payment. Here are some steps you can take.

1. Use a Calculator for Principal and Interest

Using an online mortgage calculator, you can find the principal-and-interest portion of your payment by entering the following details:

• Home purchase price
• Down payment amount
• Mortgage interest rate
• Loan term

2. Learn About Your Property Tax Rate

If you’re planning to buy a home, you can contact your county tax assessor’s office to find out what your property tax rate would be, as well as the assessed value of the property you’re looking to purchase.

If you’re an existing homeowner, you may receive a notice each year showing your tax rate and your home’s assessed value. In either case, you’ll multiply the two figures to get your annual property tax bill. Then, you’ll divide that figure by 12 to determine how much you’ll pay monthly.

3. Shop Around for Homeowners Insurance

Take some time to research and compare several quotes from insurance providers to ensure you get the best deal. Keep in mind, too, that insurers often offer discounts if you bundle your home and auto insurance.

Once you’ve chosen a carrier, divide the annual premium by 12 to help determine your monthly escrow payment.

4. Ask About Mortgage Insurance

Calculating mortgage insurance premiums can be challenging without speaking with a lender because the cost may vary depending on the type of loan you choose, the original loan amount and your down payment.

If you’re not ready to talk to a lender, you can look at the cost ranges listed above for the type of loan you’re eyeing and make an estimate based on your expected loan amount. Then, divide the annual amount by 12 for your monthly contribution.

5. Add It All Together

Once you’ve calculated each aspect of your monthly payment, you can add them all together to get an idea of your full mortgage payment amount.

Improving Your Credit Can Reduce Your PITI

Having a good credit score can help you not only qualify for a lower interest rate, but it could also make it easier to qualify for a lower homeowners insurance premium and, if you’re taking out a conventional loan, even a lower PMI rate.

As a result, it’s crucial that you take time to build credit before buying a house. One way to do this is to register with Experian to get free access to your Experian credit report and FICO Score. Your score can give you a general idea of your credit health, and your report can help you pinpoint which areas need some improvement.

While it can take time to improve your credit, your efforts could pay off to the tune of hundreds or even thousands of dollars in savings every year.