What is PITI? Mortgage payments explained

Dan Green
The Mortgage Reports contributor

What is PITI?

Your monthly mortgage payment can be broken down into four parts: principal, interest, taxes, and insurance. Together, these parts are known as “PITI.”

Mortgage lenders look at your entire PITI payment, not just principal and interest, when they determine the maximum size of your mortgage loan. So you’ll want to factor in all four parts when you estimate your home buying budget.

Once you know your PITI payment, you’ll have a much clearer idea of how much house you can afford.

Find your home buying budget (Mar 6th, 2021)

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What does PITI stand for?

Most loans are repaid in two parts: principal and interest (P&I). This includes repaying the money you borrowed along with interest to the bank.

But when it comes to a mortgage loan, P&I aren’t your only expenses. You also have to pay for homeowner’s insurance and property taxes.

All these homeownership costs are bundled together in one monthly payment, often referred to as ‘PITI.’

The PITI acronym stands for:

  • (P) Principal — The amount of your mortgage loan’s principal balance repaid each month
  • (I) Interest — The amount of interest your mortgage lender collects on the loan
  • (T) Taxes — Property taxes required by your city and county government
  • (I) Insurance — Homeowners insurance and, if required, private mortgage insurance premiums (PMI)

If you want to know how much house you can afford, you need to consider your entire PITI payment — not just principal and interest.

Budgeting for taxes and insurance as well as P&I will get you much closer to the loan amount a lender will actually approve you for.

Find your home buying budget (Mar 6th, 2021)

How PITI affects your borrowing power

When you get a mortgage, lenders have to verify your ability to repay the loan.  

To make sure you’ll be able to afford your monthly mortgage payment, a lender is going to compare your projected PITI to your gross monthly income.

This helps a lender determine how large of a mortgage payment — and how large of a loan — you can afford on your current budget.

Typically, your PITI combined with existing monthly debts — like student loan and auto loan payments — should take up less than 43% of your gross monthly income (or 50% in special cases). This is known as your ‘debt-to-income’ ratio, or DTI.

That’s why it’s important to consider all the costs of your mortgage when you’re estimating how much house you can afford.

If you look only at principal and interest, and leave out taxes and insurance, you’ll come up with a significantly higher loan amount than you actually qualify for. Take a look at one example:

  Principal & Interest ONLY Principal, Interest, Taxes, and Insurance (PITI) 
Current Monthly Debts $250 $250
Annual Income  $70,000 $70,000
Estimated Mortgage Payment  $1,850 $1,850
Estimated Home Buying Budget $523,070 $418,270

*Example assumes a 30-year rate loan with a fixed interest rate of 3.375% and a 20% down payment. 

In the example above, ignoring taxes and insurance adds over $100,000 to your home buying budget.

It would be a sore disappointment to start house hunting based on those numbers, only to find out after speaking with a lender that your budget is $100,000 short of what you’d estimated.

Yet many popular loan calculators, including those on real estate websites, often don’t account for insurance and tax payments.

Also, advertisements are less than forthcoming about the “TI” part of PITI. Be wary of ads that claim you can “get a $250,000 mortgage for $1,000 per month.”

You can get a better estimate by using a mortgage calculator that includes principal, interest, taxes, and insurance — the entire PITI package.

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How to calculate your PITI correctly

You can use a calculator to easily estimate your PITI payment online.

The number you get won’t be exact, because mortgage rates change every day, and your taxes and insurance will likely be estimated. But this will be a close enough figure to start budgeting for homeownership.

Calculating your P&I payment

The first two parts of your PITI — principal and interest — are easiest to estimate.

You can find today’s mortgage rates online. And when you use a calculator, your principal and interest payments will be automatically calculated based on the loan amount.

Calculating property taxes

Figuring out your taxes and insurance is a little more involved.

To estimate your property taxes, you’ll need to know the home’s value and local tax rate.

You may already know the home’s value if you have your eye on a property. But you can also check public records online. And tax rates can be found on your local tax assessor or municipality website.

See this helpful article on calculating your property taxes for more.

Calculating homeowner’s insurance

To find out what your homeowners insurance premium will be, estimate 0.25% of the purchase price. This will yield an estimate which is likely in the ballpark of your actual premium.

But it could be way off too. If you have a property address, get a quote from the insurance agent that insures your car.

Insurance companies are usually happy to give a free quote even if you don’t end up using them. But they likely won’t give an estimate without a specific property. In that case, use the estimated calculation above.

Next, divide the annual rate by the 12 to estimate your monthly homeowner’s insurance cost.

This amount of money — plus 1/12th of your annual property tax rate — will be paid along with your mortgage principal and interest each month.

Over time, your local tax rates and homeowners insurance costs may change. This means your monthly mortgage payment can change annually over the life of the loan — even if you have a fixed-rate mortgage.

HOA dues & home warranties

Note that PITI does not include homeowner’s association fees which some neighborhoods require. Nor does PITI include home warranty premiums if you choose to buy a warranty.

For mortgage qualifying purposes, lenders will lump HOA dues into your housing costs, even though you won’t pay those with the mortgage payment.

Lenders typically won’t factor warranty costs into your monthly obligations.

But whatever extra costs are required, you’ll want to plan for them as well, since they’ll affect your total monthly housing payment and home buying budget.

Verify your home buying eligibility (Mar 6th, 2021)

Mortgage escrow and your PITI payment

Paying all four parts of your PITI at once simplifies your monthly housing payments.

If paid separately, you’d have to send the four parts of your PITI payment to separate collectors.

Mortgage payments (consisting of principal and interest) are typically due monthly to your loan servicer; real estate taxes are due annually or twice a year to your local taxing authority; and homeowner’s insurance is due to your insurer.

Instead, most homeowners make one monthly payment to their mortgage loan servicer. The mortgage company then distributes the amounts due to the insurance company and tax authority.

This process is facilitated by an “escrow account,” which is where your lender stores the money for taxes and insurance until they come due. 

What is escrow?

An escrow company is a neutral, third-party company that facilitates money changing hands during a big transaction.

Escrow comes into play a couple of different ways when you buy a house.

During a home sale, an escrow company will help manage the funds moving around — from earnest money to real estate agent commissions, inspectors, and profits from the home sale.

You can learn more about how escrow works during a home sale and how it can affect your closing costs here.

In this article, we’re more concerned with how escrow works after a home sale, as it relates to PITI and mortgage payments.

Why use an escrow account

By making a single PITI payment to your escrow account each month, you cover all your major homeownership costs at once. This reduces the hassle of managing your housing bills.

But there are other benefits of using a mortgage escrow, too.

One is that you get to pay your taxes and insurance in monthly installments, rather than paying six months’ or a year’s worth of dues upfront. That’s a more manageable way to make payments for many home buyers.

But the biggest benefit is that home buyers who use an escrow account typically get lower mortgage rates.

That’s because escrow is a less risky arrangement for lenders. Since your lender has invested in your property, it wants you to keep the taxes paid and the insurance policy active.

Escrow accounts help you keep your taxes and insurance up to date, so lenders are willing to offer better mortgage rates to borrowers who use escrow accounts.

If you opt in for mortgage escrow, you’re likely to see a 0.125% to 0.25% lower interest rate than those who opt out. So it’s in your best interest, as well as your lender’s, to pay your PITI using an escrow account.

Is mortgage escrow required?

It might sound like a strange arrangement, but mortgage escrow is actually the norm. About 80% of homeowners pay their mortgage, taxes, and insurance using an escrow account, according to a 2017 study by CoreLogic.

Whether or not you’re required to use a mortgage escrow account depends on what type of loan you have and how large your down payment is.

  • Conventional loans (backed by Fannie Mae and Freddie Mac) — Escrow is required on all loans with less than 20% down. If you make a 20% or bigger down payment, you may opt out
  • FHA loans — Escrow is required on all FHA loans
  • VA loans — Escrow is not required by the VA, but many lenders do require escrow for VA loans
  • USDA loans — Escrow is required for all USDA Rural Home Loans
Check your loan options (Mar 6th, 2021)

Mortgage payment FAQ

What is a PITI payment?

PITI is an acronym that describes the four parts of a typical mortgage payment: principal, interest, taxes, and insurance. The “insurance” component of PITI refers to homeowner’s insurance and, when it’s required, private mortgage insurance (PMI).

Lenders look at your estimated PITI payment when deciding how large of a loan you’ll qualify for.

What is an escrow payment?

An escrow payment is a monthly payment to your mortgage company that includes principal and interest for your loan, as well as homeowners insurance, mortgage insurance, and property taxes.

Escrow payments are an alternative to paying taxes and insurance separately. Not all homeowners are required to pay their mortgage using an escrow account, but about 80% do.

How is PITI calculated?

PITI is calculated by adding your monthly mortgage payment (including principal and interest) with your property taxes, homeowners insurance, and mortgage insurance. Homeowners insurance and property taxes often aren’t paid monthly, so divide the annual cost by 12 to get the right number for your PITI calculation.

Is HOA included in PITI?

Homeowners association dues are not included in the “PITI” acronym. However, PITI is meant to be an estimate of your total monthly housing costs — so it’s important to include HOA dues in that calculation.

One key difference to note is that PITI (principal, interest, taxes, and insurance) can all be paid together each month via mortgage escrow, while HOA is typically paid directly to your homeowners association.

Does PITI include homeowners insurance?

Yes, PITI includes homeowners insurance. Instead of paying homeowners insurance directly to the insurer, most homeowners pay premiums to their mortgage company as part of their total PITI payment. Then the mortgage company takes care of paying the insurer, via a mortgage escrow account.

How does mortgage escrow work?

During a home sale, there will be an escrow company involved that handles all the money changing hands. The escrow company will hold earnest money, real estate commissions, inspector fees, profits from the home sale, and “prepaid items” (taxes and insurance paid in advance) until the sale is finalized.

After you buy a home, escrow takes on a different meaning. For homeowners, an escrow account allows the mortgage lender to manage property taxes and insurance on your behalf. You simply pay everything to your lender as a monthly sum, and the lender forwards payments to the insurance company and tax authority via an escrow account.

Is escrow good or bad?

Using an escrow account to make your mortgage payments is typically good for homeowners and mortgage lenders. Escrow makes it easier to stay current on your accounts by paying your mortgage, property taxes, and homeowners insurance at the same time.

In addition, homeowners who use mortgage escrow typically get 0.125%-0.25% lower mortgage rates than those who don’t. A lender charges lower rates because it takes less risk when you pay into an escrow account. So you’ll actually save money with a mortgage escrow.

How can I avoid escrow on my mortgage?

If you use a conventional home loan and make a down payment of at least 20%, you’re not required to make payments to a mortgage escrow. In most other cases, mortgage escrow is required.

Will my escrow payments change during the life of the loan?

Yes, your lender will change your escrow payments in response to changes in your property tax and insurance rates. Your loan servicer should run an escrow analysis once a year to determine how much you’ll need to pay on a monthly basis in order to keep your taxes and insurance bills current. Typically, escrow payments don’t change dramatically from year to year.

Will my mortgage principal and interest payments change each year?

If you have a fixed-rate mortgage, your interest rate will not change during the life of the loan. As a result, your principal and interest payment will remain stable.

Note, the ratio of principal to interest within your P&I payment will change over time, with a larger share of the payment going toward interest early on and more of it going to the loan principal later. This is known as an ‘amortization schedule.’ But despite the ratios of principal and interest fluctuating, the amount you pay each month will remain the same.

If you have an adjustable-rate mortgage (ARM) your interest rate and monthly P&I payment are subject to change each year after the initial fixed-rate period expires, usually three to seven years after your loan term begins.

What happens to my escrow if I refinance?

When you refinance, your existing lender will send you a check for any remaining escrow funds within 45 days. This could be a considerable amount, since servicers usually hold about 12 months of homeowners insurance and 6 months of property taxes in the escrow account.

It is not possible for your existing lender to wire or otherwise transfer escrow funds to the new refinance lender or servicer. That’s why many people choose to take a higher refinance loan amount to cover that expense.

This strategy, though, increases the amount of interest paid over the life of the new loan. Many borrowers choose to pay the escrow setup costs upfront, knowing they will receive a check from their existing lender for approximately the same amount within 45 days. It may be worth taking a short-term loan or taking money out of savings to avoid incurring a larger loan for a temporary expense.

Another strategy is to cover escrow set up with a higher loan amount, then make a principal payment when you receive the refund from your existing lender. However, this won’t lower the monthly payments on your new loan.

What if I change homeowners insurance companies?

Tell your loan servicer if you change insurance companies. Aside from knowing where to send insurance premiums, your mortgage company will want to keep updated records about your insurance policy since the coverage helps protect your (and your lender’s) investment in your home. 

My insurance company sent a refund. Should I keep it?

If you change insurers after your lender has already paid your annual premium from escrow funds, your old insurance company may send you the refund of premiums. You should send this refund to your lender to deposit back into escrow — otherwise your escrow won’t have enough money to pay your new insurance company.

If you don’t deposit the refund back into escrow, your lender will soon have to increase your monthly mortgage payments to make up the difference.

Who pays my taxes and insurance after I pay off the mortgage?

You do. Or, more precisely, you still do. The difference is you’ll need to pay these bills directly. Your loan servicer used to collect extra funds each month along with your mortgage payment to cover taxes and insurance. When you pay off your mortgage, you still owe taxes, and you should keep an active insurance policy. You’ll need to plan for these expenses and make payments on your own.

What are today’s mortgage rates?

Use today’s mortgage rates to calculate your future PITI payment. Get started below.

Verify your new rate (Mar 6th, 2021)

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