PITI and Beyond: Your Mortgage Payment Breakdown
So you’re buying a house, and you know you’ll be chipping away at a mortgage payment every month. And you also probably know that it’s not just the price of the house that you’re paying. There are lots more fees. Lots more. So what exactly goes into that monthly payment? Here, we break it all down.
No matter the size, price, location, or how much you put down on your house, if you have a mortgage, your monthly payment will include four parts: principal, interest, taxes, and insurance. In the real estate biz, this is affectionately referred to as PITI. Danielle Pennington, a loan officer at BestWay Mortgages, gives a great breakdown of what this entails:
“This is the amount paid that actually lowers the balance of the loan,” she explains. In other words, this is the part of the mortgage payment that pays down the actual cost of the house.
“This is the cost of borrowing the money,” she says. Put another way, interest is the money you pay the bank in return for loaning you money in the first place. “When you take out a mortgage,” she says, “you will lock in an interest rate.
If your loan is a fixed rate mortgage, this is the rate that you will be charged for borrowing the money for the life of the loan. If you have an Adjustable Rate Mortgage, your rate will be fixed for a pre-determined amount of time and will then adjust at pre-determined intervals.”
“When you purchase a home, you will have to pay property taxes,” Pennington says. This money is paid to the local government. “Most mortgages will allow you to have an escrow account for your taxes so you don’t have to pay them all at once,” she explains.
“To figure out the portion of your property taxes that will be included in your monthly payment, take the annual property tax bill and divide it by 12; this will be the amount escrowed for property taxes. If your lender is escrowing for taxes, when the bill comes due, the lender will pay with the money they have collected over time from the borrower.”
The good news here is that you don’t need to worry about getting hit with a property tax bill at the end of the year. You’ll pay it as you go as part of your mortgage payment.
“When you purchase a home, your lender will require that you obtain homeowner’s insurance to protect the home in case of damage caused by unforeseen circumstances: fire, storm damage, flooding, etc.,” Pennington says. “Most mortgages will allow you to have an escrow account for your homeowner’s insurance so you don’t have to pay it all at once.
“To figure out the portion of your homeowner’s insurance that will be included in your monthly payment, take the annual insurance bill and divide it by 12; this will be the amount escrowed for insurance. If your lender is escrowing for insurance, when the bill comes due, the lender will pay with the money they have collected over time from the borrower.”
Keep in mind, though, that even with just these fees, your monthly payment isn’t set in stone. “Principal and interest payments are generally fixed (unless it’s a variable rate loan) but escrow for taxes and insurance are completely variable,” warns Eric Bowlin, a real estate investor and founder of idealrei.com. Every year as taxes go up or if interest goes up, [or if there’s a change with your insurance], you will find your total mortgage payment going up as well because of this.”
|PITI Component||What Is It?|
PITI Component Principal
What Is It? The amount paid that actually lowers the balance of the loan
PITI Component Interest
What Is It? The cost of borrowing the money
PITI Component Taxes
What Is It? The annual fee paid to the local government
PITI Component Insurance
What Is It? The fee for the policy that protects the home in case of damage caused by unforeseen circumstances
It would be nice if the fees stopped there (and for you, they might), but they don’t always. Here are some additional fees that may be worked into your mortgage payment.
If you don’t put 20% down on your home when you purchase it, most likely you’re going to end up with mortgage insurance. This fee exists because banks perceive a loan with less equity as a higher risk.
How much will it be? “The cost of mortgage insurance will vary based on the type of loan you are getting, your credit score, [amount of] down payment, etc.,” Pennington says. Roughly, buyers can expect their fee to be between 0.5% and 1% of the mortgage.
Mortgage insurance is common, but there are many other less common fees that may be tacked onto your mortgage payment depending on what kind of dwelling you own, or where you live. Jerry E. Robinson, Broker/Owner at 1st Choice Mortgage, suggests looking out for:
- Flood insurance if you live in a flood zone.
- Irrigation taxes, which can be monthly, quarterly, or yearly.
- Local insurance requirements: “Some people have local types of insurance,” he says, “such as in Florida, you might have a separate Hurricane Insurance Policy. And then some over 55 communities may have a monthly yard maintenance fee.
“Everyone wants a piece of the action,” he adds.
“Some neighborhoods require additional property assessments that aren’t strictly speaking property taxes,” says mortgage broker and Realtor Michael Hausam. He says this means they’re usually not tax deductible, but are instead additional sources of revenue for the local city, county, or municipality for schools, parks, or other upgrades. “These assessments are usually collected along with the underlying property taxes and are therefore included in impound account calculations, as well. If there is no impound account, the homeowner is still responsible for this payment.”
Condo owners and development dwellers, this one’s for you. “Many neighborhoods, especially newer ones and condominium projects, will also be subject to association dues,” Hausam adds. This monthly fee helps pay for the upkeep of grounds, common areas, and shared amenities. “Association dues are typically not collected by the lender, but instead paid directly by the homeowner,” he explains. “Some housing situations will have multiple associations to which a homeowner owes a monthly payment — their condominium complex may be in a larger association community, for example. These homeowners will then have two different association payments required of them.”
The Bottom Line
When it comes to estimating your monthly mortgage payment, know what you have to account for. PITI is a great start, but it may not be the end, so work with your real estate agent and lender to make sure your monthly bill won’t contain surprises.
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