Real Estate Finance Glossary: What Exactly Is PITI?
Regardless of whether you’re selling or buying real estate, there are many terms that come up. There are hundreds of these terms and it’s not practical for the average buyer or seller to learn them all. It’s not too difficult, really, particularly if you have an agent who can keep you up to speed. Even so, there are some words that you should know for your own benefit and the PITI acronym is one of them. Here is an explanation of PITI and what each letter represents.
P Means Principal
For any loan including a loan for the purchase of real estate, the “principal” is the total amount of money that you are borrowing from the lending institution to purchase the home. This figure will vary all the time depending on how much you put down on the home and how much you consequently end up borrowing from the lending institution. The principal is generally the largest portion of the PITI total.
I Means Interest
As with any transaction in which you borrow money from a lender, you are charged interest. This is how much the lender receives from you as the fee for loaning you money, based on the time value of money. It is normally expressed in percentages. Based on the terms you agree on, the interest rate can either remain at a constant percentage throughout the full term of the loan or it can vary, meaning it can be affected by factors reflecting the market and other factors.
T Means Taxes
Taxes are one of the two certainties of life, and we are all used to that. Taxes involved with owning a home typically go to local governments to pay for the local education and infrastructure such as local roads and parks. When you own a home, those tax revenues help local schools, hospitals, recreational centers and other such facilities serve local residents. The assessments are usually added into your monthly mortgage payment and they are prorated each month. The lender pays the tax to the taxing agency.
The Other I Means Insurance
You wouldn’t want to own a home without adequate insurance, and if you are buying it with borrowed money then whoever lends that money to you will insist that you are insured. Your home is your biggest investment and a insurance policy is essential to avoid sleepless nights. There are various homeowner insurance policies from which you can select what is best for your situation, which will be the subject of another article. The options available to you will vary depending on how much down payment you make on the property. If you put down of less than 20% percent, lenders will require you to get a certain policy that guarantees they will get their money if something happens to your home or if you are foreclosed on. These payments are generally added in with your monthly payment as well.