what is principal interest taxes insurance piti 
principal interest taxes and insurance piti are the components of a mortgage payment specifically they are the principal amount loan interest property tax homeowners insurance and private mortgage insurance premiums 1understanding how each component of principal interest taxes and insurance impacts your monthly mortgage payment is essential in determining the affordability of a home understanding principal interest taxes insurance piti the principal and interest on your loan usually make up the majority of your mortgage payment mortgage lenders may require borrowers to buy homeowners insurance to protect the property from damage you may also need to pay property taxes depending on the state in which the home is located together the principal interest taxes and insurance represent the monthly cost of buying a home mortgage lenders use piti to calculate various financial ratios and the total housing expense to determine whether or not to lend you the money to buy a home let s review the four components of piti a portion of each mortgage payment is dedicated to repayment of the principal the original amount borrowed for example if you take out a 100 000 mortgage loan the principal is 100 000 typically only a small portion of your monthly mortgage payment goes to paying down the principal in the early years of the loan interest is the price you pay for borrowing money and the mortgage lender s reward for taking on the risk of lending to you in the early years of a fixed rate mortgage loan a greater portion of the monthly payment goes towards paying interest rather than the principal the ratio gradually shifts as time goes by for example if the interest rate on our 100 000 mortgage is 6 the combined principal and interest monthly payment on a 30 year fixed rate loan would be 599 55 the first monthly payment would have 500 applied to interest and 99 55 to principal over the life of the loan the amount of the payment applied towards interest and principal changes the table below shows a truncated payment schedule of a 100 000 mortgage loan at a fixed rate of 6 for 30 years 2from the table above we can see that most of each monthly payment went to interest in the early years by 180 months or 15 years the halfway point another 144 was being applied to the principal instead of interest but the interest still made up more than half of the payment however by the 223rd month or approximately 18 5 years the proportion switched with more of the payment applied to principal rather than interest by the end of the loan very little was allocated to interest with most of the payment going to the principal real estate or property taxes are assessed by local governments and used to fund public services such as schools police forces and fire departments taxes are calculated on a per year basis but you can include them as part of your monthly mortgage payments the amount of taxes due is divided by the total number of mortgage payments in a given year the lender collects the payments and holds them in escrow until the taxes are due like real estate taxes insurance premiums can be paid with each mortgage installment and held in escrow until the bill is due there are two types of insurance coverage that may be included homeowners insurance protects the home and its contents from fire theft and other disasters private mortgage insurance pmi protects the lender in case the borrower defaults on the payments it is mandatory if your down payment is less than 20 of the home s value 3mortgages backed by the federal housing administration fha sometimes called fha loans include a mortgage insurance premium mip it is similar to private mortgage insurance but requires a large upfront payment along with monthly payments 4piti and mortgage affordabilityprincipal interest taxes and insurance piti are typically quoted on a monthly basis and compared to a borrower s monthly gross income to help the buyer and the lender determine the affordability of an individual mortgage because piti represents the total monthly payment the borrower will need to make a lender will look at an applicant s piti to determine if they represent a good risk for a home loan buyers may also calculate their piti to determine if they can afford to buy a particular home the housing expense ratio measures how much of your monthly gross income your income before taxes are deducted goes to paying your total housing costs in short the housing expense ratio also called the front end ratio compares piti to your gross monthly income most lenders prefer a housing expense ratio of 31 or less however some lenders may allow up to 40 5for example say a borrower has a piti totaling 2 000 broken down as follows if the borrower has 6 500 in gross monthly income their housing expense ratio equals 31 2 000 6 500 the debt to income ratio dti compares piti and other monthly debt obligations to gross monthly income also known as the back end ratio most lenders prefer a dti of 36 or less however for fha insured loans some borrowers may qualify with a dti as high as 43 67suppose the borrower above has two other non mortgage monthly obligations for a total of 2 350 the borrower s dti is 36 2 350 6 500 some lenders also use piti to calculate reserve requirements for a borrower typically there is no minimum reserve requirement for all lenders however some lenders may require reserves to secure mortgage payments in the event a borrower suffers an income loss often lenders quote reserve requirements as a multiple of piti for example two months of piti might represent a reserve requirement 8in addition to savings monitor your credit score which is a three digit number representing your creditworthiness based on your credit history borrowers with cash reserves and a credit score higher than 580 have less stringent qualifications such as a 47 debt to income ratio and a 37 total housing expense ratio 5special considerationsnot all mortgage payments include taxes and insurance some lenders do not require borrowers to escrow these costs as part of their monthly mortgage payments in these scenarios the homeowner pays insurance premiums directly to the insurance company and property taxes directly to the tax assessor the homeowner s mortgage payment then consists of only principal and interest still even if not escrowed most lenders still consider the amounts of property taxes and insurance premiums when calculating front end and back end ratios moreover additional mortgage related monthly obligations such as homeowners association hoa fees may be included in piti to calculate debt ratios frequently asked questions faqs 