You might have come across the acronym "PITI" before. But exactly what is it? Well PITI stands for Principal, Interest, Taxes and Insurance. In mortgage parlance, this identifies the 4 main components that make up your mortagage payment. Understanding the different factors that make up mortgage payments can help you make better decisions when it comes time to negotiate. So let us explore PITI.
The actual principal on a loan is the amount you initially borrowed from the lender. So, for example, if you take out a $100,000 loan, the actual principal on that loan is $100,000. When you make monthly payments toward the loan, a portion of that payment is applied toward the repaying the actual loan amount. That portion is the "P" or principal portuion of the loan payment.
Loans are structured so that you start out by paying off more of the interest than the principal. So, the principal portion of your payment will be small at first. Over time, this portion will increase as you begin to pay more principal than interest. This is known as the amortization schedule.
When a lender gives you a loan, they get paid through interest. Your interest rate determines the amount of interest you need to pay to the lender, and it impacts the size of your mortgage payments. The higher the interest rate, the higher the mortgage payments.
No matter the size of the property or where it is located, if you own a home (or are financing a home), you will pay a property tax on your home. Real estate taxes are used to fund public services. These may include schools, fire departments, or police services in your local community. The amount of taxes that you pay is based on a percentage of your property value, As such, how much tax you pay may vary from one year to the next.
Taxes may be due annually, quarterly, or semi-annually. But you usually don't need to worry about the tax schedule yourself, as lenders typically require you to include tax payments in an escrow account associated with your monthly payments. So, whenever taxes are due, the lender pays on your behalf from the escrow account.
Like with taxes, insurance payments make up a specific portion of your monthly mortgage payments. Your lender usually sets aside this amount in an escrow account and holds it until the bill is due. Then, the lender pays the insurance company on your behalf.
You have control over which insurance company and policy you select. So it is up to the insurance company to set the premiums, not the mortgage lender.
Two types of insurance coverage may be included in your monthly payments. One is property insurance, which covers fire damage, theft, or other disasters. The other type is private mortgage insurance (PMI). This is mandatory if you purchase a home with a down payment of less than 20% of the total cost. PMI protects the lender if you default on your loans and may be dropped (depending on the loan program) once you've paid off enough to reach at least 20% equity on the home.
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