What does PITI Mean?
In talking with lenders or perhaps researching different mortgage options, you have probably heard the term PITI (pronounced ‘pity’) casually thrown out. PITI is an acronym and is easy to understand, and we’ll go into detail in this article explaining each word in the acronym. PITI stands for principal, interest, taxes, and insurance and is a way of referring to your full and complete monthly payment. Usually, when you hear the word PITI, you’ll hear it in the context of “PITI payment”. So let’s talk about each part of your PITI payment.
“Principal” refers to the amount you still owe on the home. So if you bought a home for $200,000 and have paid off $30,000 of it so far, you still owe $170,000 of principal. As far as your monthly payment goes, principal is a good thing – the amount of your total monthly payment dedicated to principal is the only part of the payment that isn’t throwing money away. You want the principal to be as high as possible. If you can afford to pay more than your monthly minimum payment, you should usually do so. When you make more than the minimum payment, everything extra you pay goes towards principal. If you can always make sure you’re paying more principal than interest each month (nearly impossible on a 30-year fixed), you’ll pay off your mortgage much faster and pay a lot less in interest.
If you’ve read many of my articles you’ll already know that I detest interest with a passion. Interest is the super-villain of your finances. The larger this amount is on your monthly payment, the worse off you are. Interest, along with principal, are the two parts of your monthly payment that you have a certain amount of control over. You can control how much interest you’re paying by making the right choices before loan closing. Choose the loan option that gives you the lowest interest rate. Usually, this will be the VA hybrid ARM, but you may find the 15-year fixed to be a good option. The nice thing about the hybrid ARM is that it reamortizes every year based on how much principal you still owe. Explaining the magic of reamortization would take an entire article, but just know that it means your monthly payment can go down even if your interest rate goes up. Ask a loan officer to learn more.
Taxes are something you can’t control; if you live in an area that charges property taxes (which is most places in the country), you’ll be paying 1-3% of your home’s value every year to the government for the privilege of owning it. Taxes aren’t always included in your monthly payment, but they usually are. The reason you are able to pay taxes in the same payment as principal and interest is because your mortgage company takes care of them for you. Property taxes are due annually, so your mortgage company takes the amount you pay each month and puts it away into an escrow account. When the time of the year for property taxes rolls around, the company empties the escrow set aside for taxes and pays them on your behalf. The same thing often happens with insurance.
The insurance that is usually included in your PITI payment is homeowners’ insurance, which protects your home and property in case of a natural disaster or other destruction outside of your control. Your insurance payments are also usually due annually, so when you pay it as part of your monthly payment, your mortgage company puts it away in escrow just like with taxes. You can control the costs of insurance inasmuch as you can shop between different agents or companies, but compared to the thousands and thousands of dollars that a lower interest rate will save you, there’s not going to be huge differences between insurance offerings.
The two parts of your PITI payment that you have direct control over are principal and interest. You should engineer your mortgage to pay as much principal as you can and as little interest as possible. Taxes and insurance are necessary evils, but they don’t makeup as big of a portion of your monthly payment as principal and interest.