Mortgage Dictionary -> Piti
The 4 components of a mortgage - Principal, interest, taxes and insurance
The concept of a mortgage seems rather simple. You take out a loan in order to pay for your house, and gradually pay the loan back over 30 years at a payment amount set by the lender. While this is essentially what happens with mortgages, you probably don't realize the true components of every mortgage: principal, interest, taxes and insurance. If you're wondering just where your mortgage money is going, you'll want to read on to understand PITI.
What is PITI?
PITI is simply an acronym that stands for principal, interest, taxes, and insurance. Every mortgage includes these four things, whether you realize it or not. And each component is extremely important as well.
If you think back to your high school economics class, you might remember the definition of principal. If not, here it is again. The principal is the amount of money you borrowed. So if you took out a mortgage at $120,000, the principal would be $120,000. As you pay off the mortgage, the principal goes down.
Why would a lender give you a loan if there's nothing in it for them? Interest is simply the lender's cut of the transaction it's what they get for allowing you the privilege of borrowing their money. The interest of the loan is based off of an annual interest rate usually between 5 and 13% - and also the principal of the loan. Depending on the principal and interest rate, you may be spending anywhere from $20-$200 in interest per month.
While not always built directly into the mortgage, taxes still factor into the equation. Taxes apply to the property itself and are based on the rates that the city in which the property is in has determined. Taxes are usually a rather big part of owning property, as they can cost the homeowner thousands of dollars per year.
Practically all mortgage lenders require that the properties in the mortgage are covered by some form of homeowners insurance. In almost all cases, the price of this insurance is wrapped into the monthly mortgage payments, so there's a good possibility that you're doling out $100 of your mortgage payments every month to the insurance company. The insurance, of course, is useful in the case of an accident on your property, as it will take care of those costs.