Explanation of PITI
In a previous article, we explained the difference between closing costs and escrows. In this article we will explain another term frequently heard, PITI. PITI is the abbreviation for: Principal, interest, taxes and insurance. PITI encompasses the entire monthly mortgage payment amount borrowers putting less than 20% down can expect to pay.
By Wikipedia definition, principal (principal balance) is: the amount due and owing to satisfy the payoff of the underlying obligation. Amortized mortgage loans automatically pay a portion of each monthly payment to the principal balance with the rest being paid as interest.
Interest is defined as: a financial charge for use of the lender's money.
The taxes and insurance portion of your payment is typically held in an escrow account that will be used to pay those obligations on your behalf. See our article here to explain that portion of your payment.
In simpler terms, principal is the amount you borrowed and interest is the money that the lenders make for loaning you the money.
Your payment amount is based on a few things: 1) The amount you borrow from the financial institution or lender, 2) The mortgage interest rate and 3) The term of the loan, how many years you will take to re-pay.
First-time buyers often borrow between 95% and 97.5% of the purchase price while families in a more established financial position often borrow less, between 80% and 90% of the purchase price.
Mortgage interest rates vary by borrower. No two loans are the same. Rates are typically based on credit-score, but not always. Sometimes borrowers elect to have a higher interest rate to include some closing costs, therefore lowering the amount of cash they need to close. Likewise, some borrowers opt for the lowest rate available and elect to pay finance charges in cash at closing instead of being rolled into the loan. Your lender can help you decide the best fit for your family’s financial situation.
Interest rates today are at historic lows and have been noted as little as 3.5%. When I bought my first home in 2001, we were thrilled with our 7.5% interest rate. However, when my childhood home was being built in the 1980’s, rates were 17% – 18%. Can you imagine if we had those rates today? People still bought houses but it would really impact a family’s budget. Today’s low rates are not expected to last but buyers that are able to purchase a home are borrowing at the lowest rates in history. As the economy strengthens, rates will raise along with home prices.
Once your loan amount and mortgage rate are calculated, you will determine your payment schedule. Most families will opt for 30-year, 360-month payment schedule. There are also 15-year mortgages available for those that can afford a larger payment amount. These 15-year mortgages are usually at a slightly higher rate since you will be paying it back quicker. On the flip-side, 40-year mortgages are available with some lenders. This will lower the monthly payment but extend the terms by 10-years or 120 payments.
That’s it. PITI. Principal, interest, taxes, insurance. Fairly simple, once you break it down into smaller pieces.
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About Adams Homes
Founded in 1991 by Wayne Adams, Adams Homes started serving homebuyers in Pensacola, Florida. Throughout the 1990's and early 2000's, Adams Homes grew its business into markets throughout Florida, Alabama, and Mississippi. Since 2005, Adams Homes has expanded into markets in North Carolina, South Carolina, Georgia, and Tennessee with corporate headquarters located in Gulf Breeze, Florida.
As one of the largest privately-held new home builders, Adams Homes has built more than 35,000 new homes since its inception in 1991. Adams Homes caters to first-time buyers, move-up buyers and empty nesters in more than 100 communities. With a portfolio of home designs featuring both concrete block/stucco exteriors as well as all brick homes, Adams Homes has a selection available for nearly every budget.
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