PITI Payment Calculator
Total Monthly Expenditure
Understanding PITI: The True Cost of Homeownership
When budgeting for a new home, many first-time buyers focus solely on the mortgage payment. However, the mortgage is only one part of the equation. Lenders use a formula known as PITI to determine how much a borrower can afford and to calculate the debt-to-income (DTI) ratio.
What Does PITI Stand For?
- Principal: This is the portion of your payment that goes directly toward paying down the remaining balance of your loan.
- Interest: This is the cost you pay the lender for borrowing the money. In the early years of a mortgage, interest often makes up the largest portion of the payment.
- Taxes: Real estate or property taxes are assessed by local governments. Most lenders collect 1/12th of your annual tax bill each month and hold it in an escrow account.
- Insurance: This includes homeowners insurance to protect the property. Like taxes, this is usually paid annually but collected monthly via escrow.
Why PITI Matters
Lenders typically prefer that your total PITI payment does not exceed 28% to 31% of your gross monthly income. This is often referred to as the "front-end ratio." By calculating the full PITI—including additional costs like Private Mortgage Insurance (PMI) and Homeowners Association (HOA) fees—you get a realistic view of your monthly cash flow requirements.
Real-World PITI Calculation Example
Let's look at a typical scenario for a home purchase:
| Component | Amount |
|---|---|
| Monthly Principal | $1,150 |
| Monthly Interest | $750 |
| Annual Property Tax ($4,800 / 12) | $400 |
| Annual Insurance ($1,200 / 12) | $100 |
| Total Monthly PITI | $2,400 |
In this example, while the "mortgage" might seem like $1,900 (Principal + Interest), the actual amount leaving your bank account is $2,400. Always ensure you account for the "T" and the "I" to avoid financial strain.