PITI and Escrow

Although "PITI" and "escrow" are both words that are commonly used by real estate agents, mortgage brokers and other home ownership professionals, they can seem overwhelming for couples who are purchasing a home. Understanding what PITI and escrow are and how they are interrelated is essential to knowing what kind of mortgage payments you can afford.

PITI

PITI is an acronym for principal, interest, taxes and insurance. These are the four elements of your monthly mortgage payment, assuming that you put your insurance and taxes in escrow. The principal payment, which goes toward the original loan amount, is subtracted from the original amount of your note to lower your debt. The interest portion of your payment pays interest on the loan, and is calculated by multiplying your APR by your debt. The other two portions of your payment are both escrow elements.

Escrow

An escrow account is a separate bank account, managed by your mortgage holder, which works like a savings account. The tax and insurance portions of your PITI are billed monthly with your house payment and interest, but they go into this escrow account to be held for future use. Your annual homeowners' insurance bill and private local property tax bills are then sent to your mortgage holder, whose accounting department pays them from your escrow account. This system makes sure that your home is both insured and current on taxes at all times.

Placing insurance and taxes in an escrow account both raises your monthly payment and simplifies your life. Understanding each element of PITI monthly payments gives you an important sense of control over your mortgage and where your money is going.