What is PITI and How Does it Affect a Home Loan Payment?

From Enlightenme.com

When it comes to your home loan payment, PITI is an important acronym. Your home mortgage payment can basically be lumped into four kinds of costs:

Your principal: the total amount of cash you borrow from the lender

Your interest: the amount the lender charges you to use the money to buy the house

The taxes you owe on the property

The insurance you need to protect the property against damage from hazards, floods, fires, and other potential disasters.

The forecasts for these four costs are sometimes referred to as PITI, and the evaluation of these costs can profoundly impact your monthly payment.

Home Loan Payment PITI Components

Obviously, your principle is the most critical component of the PITI. If you borrow $500,000 in principal, you will need to pay that money back either in small, evenly spaced increments or in bulk at various points along the term of your mortgage.

If you put a lot of money down at the beginning of your mortgage to chip into the principal, you will often be able to negotiate a lower interest rate. On the other hand, if you choose an interest-only mortgage or an adjustable rate mortgage with low early term payments, you’ll have to make up the bulk of the balance down the line.

Your property taxes and insurance aren’t necessarily affected by the cost of the principal and the amount you’re paying for interest. However, if you buy a house in a luxury neighborhood, or if you make improvements to the property after the fact, your property taxes may go up.

Similarly, if you live in an area that’s prone to a natural disaster of some sort — on the coasts, in a flood zone, near a forest where dangerous conflagrations have occurred in the near past — your hazard insurance will likely be high.

Calculating PITI

You can use a home loan calculator to determine the types of monthly payments you can afford. Once you have this figure, you can then determine the amount of principle you can afford to borrow given the current market interest rates, your credit history, your employment track record and earnings forecast, and several other variables which your lender or broker can explain to you in greater detail.

You can alter different components of the PITI individually or play them off each other (e.g. adjust the balance to get a lower interest rate, or adjust the type of mortgage, so that you can pay off the balance over a longer term and thus save on your monthly expenses) to brainstorm possible long-term housing budgets and to fully understand the home loan payment PITI relationship.