How to Calculate Total Monthly Mortgage Payments

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How to Calculate Total Monthly Mortgage Payments

What is “PITI”?

PITI is an acronym lenders use to describe the different components that make up your monthly mortgage payment. It stands for: principal, interest, taxes and insurance. (It’s is important to note that the payments of taxes and insurance are also known as the “escrow” payment or portion)

Principal: This is the actual portion of the payment that goes to repay the principal balance of your loan. On a standard “self amortizing” loan, a portion of the principal is usually paid off with each mortgage payment thereby gradually reducing the outstanding balance you owe and increasing your home equity (the portion of the home you own). The principal component of each payment is typically very small in the first few months, but increases during the life of the mortgage as the mortgage balance drops. Some types of loans do not have principal payments, including interest-only mortgage, which does not include any principal repayment in the monthly calculation.

Interest: The interest is the amount a lender charges you for borrowing the money to buy the home. Initially, the largest part of your mortgage payment goes toward paying off the interest. However, as time goes by and you begin to pay off your mortgage, more of your monthly payment goes toward paying down the principal and less toward paying off the interest. (Your mortgage rate can change periodically if you have an adjustable-rate mortgage. It can also change if you renegotiate your mortgage or make a lump payment to lower the principal which will help save interest towards the end of your mortgage).

Taxes: Most homeowners also pay their real estate taxes as part of their mortgage payment. The lender passes these on to the local municipality to pay for community schools, roads, police and other municipal services. Depending on your actual Real Estate Tax amount, taxes can be a significant part of your total mortgage payment, and tax rates can vary significantly from area to area. So it’s wise to find out the EXACT local tax rate. The estimates we give are based on the estimates we obtain from you, the realtor, the appraiser, etc and are not 100% accurate until we get the title report and confirm it with your township.

Insurance: The fourth component of your payment is homeowner’s insurance, which gets collected by your lender and paid to your insurance company. Typical homeowner’s insurance protects your home and property against fire or other damage. You may need supplemental coverage for other risks. For example, you may need flood insurance if your home is in an area with a high risk of flooding. If you buy your home with less than a 20 percent down payment, you may also be required to have private mortgage insurance (PMI) to protect the lender from default.

To calculate your total PITI: