PITI - More Than Just Your Mortgage Payment

During your home buying travels, you may have seen the letter combination of P-I-T-I or heard it spoken as "pity." PITI represents four individual components which together make up your monthly mortgage payment.
P is for Principal Mortgage principal is the actual dollar amount you will borrow from your lender. Your principal will be calculated by subtracting your down payment from your offer amount on your new home. Each month, a portion of your principal is paid, gradually bringing down the amount you owe. In the beginning, you will notice the amount of your monthly mortgage payment that goes toward principal is very small. Most of your payment will consist of interest (more on interest in a bit). However, as time goes on and your principal balance decreases, your principal repayment amount will grow.
I is for Interest Mortgage interest is the extra money you will pay for the privilege of borrowing money to purchase your new home. The monthly mortgage payments early on in your loan will consist mostly of interest, as much as 80%. It can be quite disheartening when you see that your principal balance will barely move but the amount of interest paid will add up very quickly. The good news is that in most cases, all the interest you paid can be deducted from your federal income taxes.
T is for Taxes Your local government (at the municipal or county level) will levy taxes on your new home. This tax is typically called "real estate tax" or "property tax." Your annual real estate tax amount due will be calculated using the appraised value of your home. Although your tax bill will be due once a year, you mortgage lender will put aside money each month into an escrow account; a type of savings account. This money will come directly from your mortgage payment and will be used to pay your taxes, by your lender, when due. For more about escrow, view our prior post: Escrow Account - An Introduction for the First Time Home Buyer.
I is for Insurance It is unlikely you will be able to secure a mortgage on your new home without taking out a homeowner's insurance policy. As with your property taxes, your mortgage company will put aside money into escrow each month to pay your home insurance premium when due. And you guessed it; this money will come from your monthly mortgage payment.