What Is PITI?

If you are a homeowner, you are familiar with mortgage payments. But have you ever considered what makes up a mortgage payment, and what all the numbers on your statement mean? Four little letters – PITI – add up to your monthly housing cost, and here is what each represents in your life every month.

The P factor

P stands for principal, the monthly amount paid to reduce your mortgage balance. By checking your mortgage statement or online bank website, you can verify the principal number. It may seem quite low, but that is because you are repaying your loan over a long period of time – 30 years, or 360 payments, is a common standard. So while the principal payment each month may seem small, it adds up over time.

Interest in interest

Next is I, for interest. Particularly at the beginning of a mortgage payback period, this can be a frighteningly large number. Remember, though, that since your mortgage interest is typically deductible on your U.S. income tax, a high interest number actually works in your favor. It is calculated by applying mortgage factors to your loan amount, interest rate and term.

Pay the taxman

The third letter is T, for taxes. Each year your local fiscal authority determines your tax amount, and then they send that information to your mortgage company. They divide the total tax amount by 12, and include that monthly share of local taxes in your payment.

Insuring your home

Finally comes a second I, this one representing insurance. Homeowners' insurance is a must, and the monthly amount you pay is determined similarly to the tax payment. Your insurance company sends the bill to the mortgage company, who then divide the total amount by 12 and add that fraction to your payment.

It is a pity to misunderstand PITI, because the concept is fairly simple. By doing a bit of research you can fully grasp the meaning of all four letters, and appreciate what you are paying for each month.