PITI: The 4 Components of a Mortgage Payment

North Carolina Beach Houses

Learn about what your mortgage professional is talking about when he or she mentions PITI

As you may know, when you make a mortgage payment, you aren’t just paying one big chunk toward one balance. In a typical mortgage arrangement, your payment will be divided into four parts that will go toward four different debts. Principal, Interest, Taxes and Insurance are the four main components of a mortgage payment. Whenever you make a monthly payment, your money is divided among these four balances.

Here’s a simple look at how your monthly payment is divided among the four components.

  • Principal: The original amount of the loan. If you buy a house for $150,000 and you put $15,000 down, then the principal of your loan would be $135,000. Very little of your early payments will go toward paying off the principal.
  • Interest: The total amount of interest that will be applied to the principal. Using the same example above, say you take out a loan for $135,000 at a 4 percent interest rate. Four percent of $135,000 comes to $54,00, which will be added to your overall mortgage balance. Most of your early payments will go toward interest.
  • Taxes: Your obligatory payments for city, county or property taxes. Many homeowners pay their property tax obligations as part of their monthly mortgage payments and their mortgage servicer puts the amounts into an escrow account until the bills are due. This is simpler for home owners who pay the same amount each month rather than having to come up with enough money to cover a large tax bill once a year. Mortgage lenders also prefer it because they can be certain the money is there to pay the taxes due. If the homeowner failed to pay his or her taxes a lien could be put on the home jeopardizing the mortgage lender’s interest.
  • Insurance: Payment for homeowner’s insurance to cover damage to your home or property. Most insurance policies are not all-inclusive, so be sure you understand exactly what is covered in your policy. Homeowners insurance (and any other applicable policies such as flood insurance) is often paid for as part of the payment and put into an escrow account just like the property tax payment. If you purchased a home with less than 20% down, you may be required to pay private mortgage insurance (PMI). This protects the lender if you should default on your loan.
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