Everybody eventually has to enter the real estate market in one way or another. Whether you are an investor, tenant, homeowner, slumlord, or whatever, you will eventually come across the term “PITI” in your life. I will attempt to explain what this acronym stands for, and what it means for you.
“PITI” stands for “Principal, Interest, Taxes, and Insurance.”It is a term used when referring to the components of a mortgage payment.
For those of you who don’t know what a “mortgage payment” is either–no worries, I’ve got your back! A mortgage payment is a regularly scheduled payment to a lender of a home loan.
This scheduled payment includes principal and interest: the principal portion is used to pay the original loan amount; the interest is used to pay the lender for the privilege of borrowing money from them. This mortgage payment may or may not include real estate taxes and property insurance owed to the lender; the mortgage payment will not necessarily contain this, but many do.
The “taxes” referenced here refer to the property taxes you pay as a homeowner. “Insurance” refers to both your property insurance and your private mortgage insurance. These four components make up the widely-used acronym PITI.
So what does it mean for you? PITI is typically quoted on a monthly basis and stacked against a borrower’s monthly gross income in order to approve mortgage loans. Generally, mortgage lenders prefer PITI to be equal to, or less than 28%, of a borrower’s gross monthly income.
So now we know that your debt-to-income ratio to be greater than or equal to 28% of your monthly income (typically) in order to be approved for a mortgage loan. Where can you calculate this information?
RealEstateABC.com offers a great PITI calculator on their website here. It’s actually very straightforward. You input your data, (Mortgage term (years), interest rate, the amount of the loan, annual taxes, and annual insurance), press the button, and presto!
So let’s try an example and see what we’ve learned in action:
Let’s say that you are a borrower with a monthly income of $3,000. You are trying to find out if you will be approved for a mortgage loan. (In this scenario, let’s set the debt-to-income ratio at 28%.) So in order to be approved, your PITI must be greater or equal to 28% of $3,000. (.28) * ($3,000) = $840. Let’s see if we would qualify for the example data listed above.
We are getting a 30-year mortgage term, an interest rate of 6.5%, a $100,000 mortgage loan, annual taxes of $1000, annual insurance of $300. (Bear in mind, these are made up numbers but they are not unreasonable.) We hit “Calculate Now!” and receive the following numbers:
In this scenario, the Total PITI Payment comes out to be $740.40, which is less than the $840 that made up 28% of our monthly income. In this scenario, we would likely be approved for a mortgage loan.
Now you (hopefully) understand what “PITI” is, and also you understand how it affects you, and how to calculate it!