PITI (Principal, Interest, Taxes, Insurance)
In real estate, PITI stands for Principal, Interest, Taxes, and Insurance, which are the four components of a typical mortgage payment.
1. Principal: This is the portion of the mortgage payment that goes towards reducing the outstanding balance of the loan amount borrowed to purchase the property.
2. Interest: This is the cost of borrowing money from the lender, expressed as a percentage of the loan amount. It is the financial compensation the lender receives for providing the funds.
3. Taxes: Property taxes are assessed by local governments based on the value of the property. Lenders often collect a portion of the annual property tax bill each month as part of the mortgage payment and hold it in an escrow account to ensure that taxes are paid when due.
4. Insurance: Homeowners insurance is typically required by lenders to protect the property and the lender’s financial interest in the event of damage or destruction. Mortgage lenders often require borrowers to pay homeowners insurance premiums as part of their monthly mortgage payment. Additionally, for borrowers with less than a 20% down payment, private mortgage insurance (PMI) may be required, which protects the lender in case of default.
Together, PITI represents the total amount a borrower pays each month to cover the principal and interest on the loan, property taxes, and insurance costs associated with homeownership. Understanding and budgeting for PITI is essential for homeowners to manage their finances effectively and ensure they can afford their mortgage payments.