How To Protect Your Mortgage

How well do you understand your monthly mortgage bill?

If you have a mortgage, you need to understand PITI, or Principal, Interest, Taxes and Insurance. Or if you’re shopping for a home, you want to know your estimated PITI so you know your mortgage is affordable. The bottom line is that your mortgage payment includes more than only the borrowed amount.

The mortgage company needs to protect their interest in the property. That requires escrowing funds to pay property taxes and homeowners' insurance. You may also have homeowners’ association or condo fees included in your mortgage payment, but not usually.

PITI Explained

The principle and interest for a fixed-term mortgage is rather straightforward. Principal plus interest is the amount going to repay the loan.

With a fixed-rate mortgage, this total amount won’t change much over the course of the 20- or 30-year mortgage. However, the amount applied to the principal portion and the amount applied to interest will change with each payment as the principal decreases.

Many online calculators provide an “amortization schedule” based on your specific loan.

Several allow you to enter all of your PITI information to determine your full monthly payment.

The interest rate for an ARM loan can significantly change the amount owed each month, and there isn't a way to predict your future interest rate without a crystal ball. 

In fact, there are three broad categories of ARM loans: hybrid ARMs, interest-only ARMs and payment option ARMs. And each of these has many versions.

Typical hybrid loans are: 3/1, 5/1, 7/1 and 10/1. The first number is how many years the loan is at a fixed interest rate. The second number is how many times a year the interest rate can change after the fixed interest rate expires.

You can’t be sure of the future interest rate, but you use an ARM calculator to look at different possibilities by guestimating future interest rates.

For any mortgage, fixed rate or adjustable, the taxes and homeowner insurance are variables. Property taxes vary more than homeowner insurance. Your property taxes support community schools, roads and other public services.

Tax rates are set at the local level and change over time. A base property tax likely exists where your home is located. And voters approve mechanisms like municipal bonds that are repaid from property taxes. These can increase the property tax that you owe.

When bonds are paid off, the tax you pay might go down.

Homeowners' insurance is a personal decision, although your lender may have specific requirements or minimums. Generally, you can shop for your homeowners' insurance to compare different types of policies and variables such as deductibles and coverage levels.

Something else common in a mortgage payment is private mortgage insurance, or PMI. You should know that PMI protects the lender — not you — if you stop making payments on your loan. Generally, you can stop paying PMI once you own 20% of the home equity. This reduces your total PITI monthly payment.

Mortgage Payment Protection Insurance 

MPPI is a completely voluntary cost. MPPI is usually taken out to protect you as the homeowner in case of a prolonged illness, job loss or other covered reason when you can’t make your mortgage payment.

Limits exist on how long your mortgage will be paid, often one or two years, so you need to understand what you are paying for. This insurance is not typically included in the PITI payment. You’ll have to make the payment separately.

MPPI can pay off the entire outstanding mortgage balance in the case of your death, although life insurance is more common for this. Another version is Mortgage Protection Insurance, or MPI. Typically, both of these policies only pay the principal and interest portion of a mortgage payment. Other fees like property taxes, homeowners insurance and HOA dues are not paid. But you may be able to add a rider on the policy to cover these.

The bottom line is that there are specific requirements and protections with your PITI as well as optional ways that you can assure that yourself and your dependents will keep your home if hardship strikes.