What is PITI?
PITI is a simple equation to lay out what is included in your mortgage payment. The lender will collect principal, interest, taxes, and insurance to ensure that bills are paid. Many home buyers do not realize that the lender will pay your homeowner’s insurance and taxes for you. Why would they do that? To be sure that they are paid and that there are no liens on the property and so the property is properly insured.
Principal is the amount each month that goes to actually paying down your loan. The amount you pay each month toward principal and interest will be the same throughout the life of the loan but as you pay off more and more the amount that goes to principal will rise. How does that work?
If you look at the amortization table below you will see as you pay off part of your loan each month the amount you need to pay interest on decreases. As you have less to pay off you have lees interest and then more of your payment goes to your principal.
Taxes represent your property taxes as determined by your municipality. Each year you will get a statement of what your taxes will be for the year and one will be sent top your lender as well. The lender will collect money for escrow before the taxes are due so they have enough on hand to pay the town what is owed. As taxes change the lender may have to change your monthly payment to ensure they have enough to pay your taxes.
The last part of the equation is your home owner’s insurance. This policy protects against loss and is a protection for both the homeowner and the lender. The policy can cover possessions like furniture, clothing, and jewelry and can protect against damage to the home. As with your taxes your lender collects the premiums in escrow and pays them when due to ensure it is up to date.
So to review PITI is a simple equation that shows you what your mortgage payment pays each month: Principal+Interest+Taxes+Insurance. Your payment may change year to year depending on your taxes and insurance and you will be notified of that change before the change is made. If you have an adjustable rate loan then your interest rate may change per the agreement you signed at the closing.
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