Definition:
PITI stands for Principal, Interest, Taxes, and Insurance—the four main components that make up a monthly mortgage payment.
Example:
James buys a house and his total monthly mortgage payment is $1,800. This includes the principal and interest on his loan ($1,200), property taxes ($400), and homeowner’s insurance ($200). Together, these form his PITI payment.
Explanation:
PITI is commonly used by lenders and real estate professionals to describe the complete monthly housing expense associated with owning a home. Each part represents:
- Principal: The portion of your payment that goes toward repaying the original loan amount.
- Interest: The amount charged by the lender for borrowing money.
- Taxes: Monthly portion set aside to pay property taxes, typically held in an escrow account.
- Insurance: Monthly portion set aside for homeowner’s insurance, also typically held in escrow.
Lenders use the PITI payment when determining how much home a buyer can afford. They usually compare PITI against the buyer’s monthly income to calculate the debt-to-income ratio (DTI). Most lenders recommend keeping PITI payments around 28% of your gross monthly income.
Buyers should understand their full PITI payment to ensure it fits comfortably within their budget—not just the mortgage loan payment alone.
Why is PITI Important in Real Estate Transactions?
PITI is important because it provides a realistic view of homeownership costs, not just the mortgage itself. Buyers who understand their complete monthly payment (PITI) are better prepared financially, reducing the risk of foreclosure. For sellers, a buyer with a manageable PITI is more likely to successfully close the sale. A clear understanding of PITI helps ensure homebuyers choose homes they can truly afford, benefiting everyone involved in the transaction.