Word of The Week: Monthly Payment (PITI)
The real estate business loves acronyms. You see everything from FSBO, to REO; FTHB to ARM; and even PITI. But what do they mean. As a first time home buyer it can get confusing. Word of the Week is here to help clear the confusion.
Today’s Word of the Week is PITI. The definition of PITI is Principal, Interest, Taxes, and Insurance.
Principal
When you take out a loan for your house, that amount of money gets divided up over the life of the loan (30 years for most loans). Therefore, this is called the Principal amount of money – it’s pretty much the purchase price of the home minus your down payment amount.
$100,000 Purchase Price
- $10,000 Down Payment
= $90,000 in Principal
Now, a common misconception is that this amount gets divided up for the number of months on the loan, and every month an equal amount is due. This is false!
What happens, is the loan amount is amortized. This means that the loan and interest are spread out for the period, but in unequal amounts. Think of it like an old fashioned dual scale: One side is heavier than the other, but over time you take away weight from that side, and the scale turns to be equal, and eventually tips to the second side.
Interest
When you obtain a loan from the bank, they agree to give you the money, but you have to pay them interest on that amount. This is also a part of your monthly payment broken down with the amortization schedule we talked about above. Usually you will pay more interest than principal for the first dozen or so years on your loan, and after a certain point the balance will shift to paying more principal than interest – but every loan is different so ask your lender for the payment schedule.
Let me be clear: the amount of Total monthly payment doesn’t change, just the places that money goes towards.
Taxes
Yes, one of the 2 absolutes in life. Everyone pays taxes, including home owners. Property taxes are due twice a year in Minnesota: May 15th, and October 15th. However, most payments plans will escrow the prorated monthly amount of tax, and hold onto it until the payment date arrives.
So, instead of having to come up with several hundred or even thousands of dollars at a time, you pay a little each month to make it seem smaller.
Property taxes are based on the County’s Assessed Value of your home, which can vary from year to year. The Assessed Value is a combination of 2 numbers. 1-Land Value, and 2-The Structural Value (the house itself).
Land Value can only stay constant or go up. Structural Value can fluctuate based on market conditions.
Insurance
Along with the Property Taxes, Insurance is something that gets placed in an escrow account and goes towards a couple different places: your Homeowner’s Insurance Policy (which covers things like fires, hail damage, etc) and also Mortgage Insurance (which actually helps the lender, if you should default on your mortgage payments).
Just like car insurance, every first time home buyer must have Homeowner’s Insurance also know as Hazard Insurance. This can be obtained from a number of different companies, so shop around for the best rates. Usually your auto insurance company can give you discounts for bundling different products together (auto, home, life, boat, etc).
Mortgage Insurance is usually applied to loans that have a Loan-to-Value range of 100-80%. This is different for every bank, so again, check with your lender. Once your loan value is equal to or below 80% of the appraised value of the home, you don’t have to pay this monthly fee anymore.
In Summary: PITI stands for Principal, Interest, Taxes, and Insurance.
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