PITI

(Also Known as Principle, Interest, Taxes and Insurance)

Your mortgage will consist of four parts – principal, interest, taxes, and insurance. These pieces are sometimes referred to as your PITI. Once you start to become familiar with real estate terms, you will start to realize that there are many acronyms used throughout the industry. If you put less than 20% toward the down payment of the loan, you might also be required to pay private mortgage insurance (PMI) as well. Here is a simple breakdown of the PITI on a conventional loan (that does not include PMI).

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Principal

The principal is actual the balance of the loan. Every month, the borrower will pay money towards the principal with the goal of reducing the total amount of the loan. At the beginning of the mortgage term, most of the money will go towards the interest on the loan. At the end of the loan, or when the borrower has built substantial equity in the loan, most of the monthly payment will go towards reducing the principal. Once the entire principal has been repaid to the lender, the borrower will own the home outright and the terms of the loan will be satisfied.

Interest

The interest the amount the lender charges you for the loan. Interest a percentage of the outstanding principal and will be added to your monthly mortgage payment. At the beginning of the mortgage, when the principal balance is high, most of your monthly payment will consist of interest. As the loan is repaid, and the principal decreases, the amount of monthly interest added to the loan will decrease as well. Interest rates are set by the lender and can vary depending on your financial situation. Typically, a buyer will qualify for a lower interest rate when they put a large down payment on the loan, have a high credit score, and have a low debt to income ratio.

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Taxes

The city and state will charge tax on personal real estate in the form of property tax. Property tax is used to help improve the roads, schools, and transportation in the area you live. Oftentimes, the lender will set up an escrow account to hold property tax. The annual property tax will be divided up into monthly payments that are grouped into the borrower’s monthly mortgage payment. This helps the borrower avoid having to pay one large sum at the end of the year

Insurance

Your lender will require that you have homeowner’s insurance before approving your home loan. Your coverage will fluctuate depending on the insurance plan you select; standard coverage includes protection against fire and other damage. In some areas, supplemental insurance (like flood insurance) will also be required. If you have put less than 20% down on the mortgage, the lender might also add private mortgage insurance (PMI) to your monthly mortgage payments.

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