The PITI Formula

If you are considering leaving the rental market and purchasing a home for yourself and your family, you may experience information overload with all the numbers and documents involved in a home purchase. While it is true that, by shopping around, you can sometimes negotiate a better rate, having a basic understanding of how to calculate a payment is always a good idea when determining if you can afford your new home payment.

What exactly is PITI?

There are many new acronyms that you are going to hear when you begin your home purchase, and one of the most common ones is PITI. This refers to the formula used by mortgage loan originators to calculate your new mortgage payment. The "P" stands for principal, which is the full loan amount owed, the second "I" is for interest, as in the interest you pay based on your rate. The "T" is for taxes, and the last "I" is for your homeowner's insurance premium. In order to get your new monthly payment, all of these four amounts are added together.

How is each part calculated?

Each of the four components of your payment is calculated with a different formula. The principal is based on the loan amount after your down payment is factored out. The interest is calculated per month over the length of your loan term; terms are usually 15, 20, 25, 30 or 40 years. The taxes are calculated according to the county in which the property resides. The homeowner's insurance is calculated by your insurance agent, and then the full premium is divided per month by the loan originator. Though it seems complicated, the formulas are quite easy for those well-versed in these types of transactions.

Buying a home can easily overwhelm you, especially if you do not have any prior purchasing experience. Familiarity with the basic concepts can help make the process much smoother and less confusing.