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Andy Brown's Blog

By Andy Brown | Mortgage Broker
or Lender in Carmel Valley, San D...

What Is PITI?

What is PITI?

The acronym PITI stands for principal, interest, taxes, and insurance. These are all components that are included in a standard mortgage payment. They should be reviewed to gain an understanding of the way a mortgage payment works.

Escrow Account

Borrowers are typically set up with an escrow account when they make an initial down payment that is less than 20 percent. This escrow account not necessarily required by a lender by can carry extra fees if not set up. This is often the case for borrowers who qualify for an FHA mortgage. A monthly payment from a borrower will apply towards the principal, interest, taxes, and mortgage insurance. All funds for taxes and insurance are held in the escrow account until those premiums are due. If a borrower makes a 20 percent down payment, then mortgage insurance will not apply.

Principal

This is an amount that is equal to the purchase price for a home. The amount may vary slightly when a borrower wants extra funds for home improvements. Principal payments for a mortgage can be made at any time and are separate from monthly interest, taxes, and mortgage insurance.

Interest

Interest on a mortgage loan will be the bulk of the monthly payment for the first 15 to 20 years. This is an amount charged by local banks and mortgage lenders to the borrower who uses their money to purchase a house.

Taxes

This is the component of a mortgage payment that typically applies when a borrow will need an escrow account. There are certain types of mortgage loans where the mortgage lender pays the taxes for the borrower from their escrow account. The taxes paid by a homeowner are typically property taxes. These will usually be paid twice each year for borrowers who do not have an escrow account.

Insurance

The payments that are made for a borrower’s homeowners insurance are also paid by a lender when the borrower has an escrow account. A borrower will have the same type of homeowners insurance used by any other person that owns a home. The only difference is that a borrower will not make payments to a local insurance agent or insurance company when an escrow account applies.

Non-Escrow Payments

Borrowers who put enough money down when purchasing a home may not require an escrow account. If this is the case, then they need to plan ahead for certain payments. The payments that are not made to a lender will include taxes and insurance. These are the last two components of PITI. A borrower may be in for a shock when they do not prepare for these additional expenses.


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