Ok, so it might sound harsh. Or, if you were born prior to 1985, it might sound like something Mr. T would say. But PITI is a very important mathematical concept to understand for calculating a mortgage payment, which is a very large expenditure to most.
If you’re not familiar with the term PITI (pronounced Pi-tee), it is an acronym for the basic costs that factor into a mortgage loan.
P is for Principal. This is the amount that you need the loan for. On a mortgage, it is usually the cost of the house. Sometimes other costs could be factored into the principal. If you wanted some extra money to do repairs on the house and borrowed more than the cost of the house itself, that would go into the principal.
I, the first “I” is for Interest. The Interest is a rate. This rate is determined by many factors. The current competing rates in the market, the amount of risk that you may not be able to pay the loan back, the amount you borrow, etc. For the lending institution, usually a bank, the interest is the “return on investment” they get for lending you money. And, this is how they make money.
T is for Taxes. Ugly little word, but very important to remember. Along with owning a home you also have a duty to pay property taxes. These taxes are usually determined yearly and set as a percentage of the perceived value of your property. How your taxes are determined will be up to the local government.
I, the final “I” is for insurance. If I’m going to loan you money to purchase a home, and you are going to use that home as collateral for the loan, then it needs to be protected. Insurance is necessary for acquiring a mortgage. A mortgage uses the value of the property as collateral in case you are unable to make your payments. If you don’t make payments, the bank can retrieve some of the money it lent out by taking the house and selling it. If the house burns down and there wasn’t insurance to cover it, both the owner, and the bank would be ruined.
So now you know what makes up the acronym PITI. To see how to calculate the math and determine your monthly PITI payment, visit CalcuNATION.com.