Legal Definitions - PITI

PITI is an acronym that stands for Principal, Interest, Taxes, and Insurance. It represents the four main components that typically make up a monthly mortgage payment for a homeowner.

• Principal: This is the portion of your payment that goes directly towards reducing the original amount of money you borrowed to purchase the home.
• Interest: This is the cost you pay to the lender for borrowing the money. It's essentially the fee for the loan.
• Taxes: These are the property taxes levied by local government authorities based on the assessed value of your home. Lenders often collect these monthly and hold them in an escrow account to pay them on your behalf when they are due.
• Insurance: This typically includes homeowners' insurance, which protects your property against damage (like fire or theft), and sometimes private mortgage insurance (PMI) if your down payment was less than 20% of the home's purchase price. Like taxes, these premiums are often collected monthly and held in escrow.

Understanding PITI is crucial for prospective homebuyers and existing homeowners as it provides a comprehensive view of the true monthly cost of owning a home, beyond just the loan repayment itself.

Examples:

• Example 1: First-Time Homebuyer Budgeting

  Sarah is a first-time homebuyer looking at a house priced at $300,000. Her mortgage lender quotes her a monthly payment of $1,800. This $1,800 is her PITI. It includes $700 for the principal and interest on her loan, $400 for the estimated annual property taxes divided monthly, and $700 for her homeowners' insurance and private mortgage insurance combined. By knowing her total PITI, Sarah can accurately budget her monthly expenses and determine if the home is financially feasible for her income.

• Example 2: Refinancing a Mortgage

  David has owned his home for several years and decides to refinance his mortgage to get a lower interest rate. When comparing new loan offers, he doesn't just look at the principal and interest portion. He asks each lender for the estimated new PITI payment. One lender offers a lower interest rate, but because property taxes in his area have increased significantly since he bought his home, and his new homeowners' insurance premium is higher, his overall PITI might not decrease as much as he initially hoped. This shows how PITI provides a holistic view of the monthly housing cost, not just the loan's interest rate.

• Example 3: Lender's Affordability Assessment

  A couple, Maria and Juan, apply for a mortgage to buy a new house. The bank's loan officer calculates their projected PITI for the desired home, which comes out to $2,500 per month. The lender then compares this PITI amount to Maria and Juan's combined gross monthly income. If the $2,500 PITI exceeds a certain percentage (e.g., 28% or 36% depending on the lender's guidelines and other debts), the lender might determine that the house is not affordable for them under current terms and may suggest looking for a less expensive home or increasing their down payment. This illustrates how lenders use PITI as a key metric to assess a borrower's ability to manage the monthly housing expense.