What First-Time Homebuyers Should Know About PITI

Every homeowner needs to have a full understanding of their PITI.

Principle, interest, taxes and insurance make up the core of most, but not all, of your mortgage payment.

Some mortgage payments include more than the basic PITI. For instance, it’s not uncommon for first-time buyers to have private mortgage insurance included in the payment. Homeowner association, or HOA, fees are sometimes included, as well other costs on a case-by-case basis.

All Homeowners Need To Understand PITI Basics

Whether you are a first-time buyer learning mortgage jargon or a longtime homeowner, you need to understand the details of your PITI payment.

Principal payment. This is the amount of money you borrowed from your lender. If you took out a $210,000 loan, the original amount of principal owed starts at that exact amount.

You’ll find this amount on an amortization schedule. With almost no exceptions, the amount of principal owed each month is reduced when a payment is made. Exceptions can include extraordinary hybrid loans and missed payments being rolled into the principal.

An amortization schedule clearly shows the amount of the payment applied to reduce the principal separate from the interest payment. Watch the principal to see how much your outstanding loan amount decreases each month.

Interest payment. This is the primary way the lender makes a profit on the money loaned to you. The amount of interest charged each month is based on the remaining principal owed. On a typical 30-year fixed rate loan, your monthly combined principal and interest remains the same.

Each month, more of the payment goes toward the principle and less toward interest. Understanding the amortization schedule shows you exactly how much goes to interest and how much goes to principal. 

Taxes. Different counties, municipalities and states have different property tax systems. Where your home is located determines the system that applies to your monthly PITI payment.

With a fixed-rate mortgage, changes in your taxes are typically the biggest cause of changes in your monthly mortgage payment. Changes can occur with the tax rate, and voters can pass tax bonds. This is an important part of your PITI to pay attention to. Keep an eye on how much is held in the escrow reserve account to pay these taxes.

About the only action you can take to change this amount is by taking an active interest in your local tax structure.

Insurance. Your lender will require you to have homeowners insurance to secure the value of the home against possible losses such as fire or natural disaster.

You may be required to meet specific requirements set by the lender, but you should be able to shop for your own insurance provider. You can compare several policy types that meet both your needs an d those of the lender. The type of policy taken out and future premium costs can make a difference in your monthly PITI payment.

How You Might Reduce Monthly Payments, PITI

Beyond the basic PITI, look for other charges in your monthly payment. You might be glad you did.

For instance, once you own 20% of the equity in your home, you can request that your lender stop charging private mortgage insurance.

This doesn’t mean you have to pay down 20% of the principal you owe on the mortgage. Your home will almost certainly appreciate in value every year. Appreciated value adds to your equity. Your lender should honor your request to stop private mortgage insurance after the fair market value of your home exceeds 20% of the principal owed.

Another place to look for a monthly reduction is in property taxes and homeowner insurance reserves — and maybe HOA fees. As you now know, these payments are going into an escrow reserve account. The amount paid each month is an estimate.

If the estimate is too conservative, the reserve account can quickly exceed what is actually needed to make the payments. If this is your circumstance, you can request that the monthly payment be reduced to more closely match what is actually needed in reserve.

If the reserve is holding three times more than is needed to make the next periodic payment, you have a good argument to have your monthly mortgage payment reduced to an amount in line with what is actually required.

The bottom line is that it can pay you to fully understand the details of your PITI payment.