If you previously rented a home before you decided to buy your own property, it might seem like making your monthly payment hasn’t changed all that much. Instead of sending a single payment to your landlord, you’re sending payment to your mortgage lender. But now that you’re a homeowner, there’s a very big difference that comes with that monthly payment – with every payment you make, you’re building home equity. So, as a new homeowner, it’s important to understand what exactly goes into your monthly mortgage payment, since it can affect how you pay off the loan.
Amid all the new terms you’re learning through the mortgage process, one stands out: PITI. That acronym is short for Principal, Interest, Taxes and Insurance, the four parts that make up your monthly payment. Below, we’ll break down each category in order for you to understand why each one matters.
What is PITI?
This is the amount you borrowed from your mortgage lender. For example, if you bought a house for $350,000 with a 20% down payment of $70,000, then you owe a principal of $280,000. Over the entire term of your mortgage, the total amount of principal plus interest will stay exactly the same. However, what will change is the percentage each makes up in your monthly payment. For example, interest might be 90 percent of your first mortgage payment, while the principal might make up almost your entire last payment. Keep in mind, you can also choose to pay extra money towards your principal if you like, which will reduce future interest.
Mortgage interest rates are always changing based on economic conditions. If you have a fixed-rate mortgage, your interest rate will stay exactly as it was when you originated the mortgage. An adjustable-rate mortgage (ARM) is a home loan with an interest rate that adjusts over time, based on the market. Charging interest is what makes mortgages and other loans worthwhile for lenders, since it allows them to make back more money than they originally loaned. You can learn more about BayCoast Mortgage’s loan products by clicking here.
There’s more to your monthly mortgage payment than just principal and interest. Your local government also charges property taxes to pay for services like public safety and education. Unlike the amount of principal and interest (at least for fixed-rate mortgages), the property taxes you pay can change from year to year. Your city or town’s tax rate may change, or the assessed value of your home may change.
But what does your mortgage lender have to do with a local tax? Property taxes are either billed annually or quarterly, depending on where you live. For your convenience, your lender will divide the expected annual tax payment by twelve and add that amount to your monthly mortgage payment. Your lender will then hold the accumulating money in an escrow account until property taxes are due, at which time your lender will pay your local city or town government directly, so you don’t have to think about it.
The final I in PITI stand for insurance, and that can include two different types of insurance:
When you buy a home, you want to protect yourself from unexpected losses, such as fire damage or a robbery. Most mortgage lenders require you to buy homeowners insurance as a way to protect their investment. Much as they did with taxes, lenders will break up the annual insurance payment into more affordable monthly payments, and then send the money directly to your insurance company.
Private Mortgage Insurance (PMI)
Not everyone can afford to make a 20% down payment on their new home. If you put down less than that, you’re required to pay insurance on the mortgage. This protects the lender, since buyers who make smaller down payments are considered a higher risk for foreclosure. The good news is that if you make enough payments to build up 20% equity in your home, you can apply to stop paying PMI and reduce your monthly mortgage payment.
If you bought your home with the help of the Federal Housing Administration (FHA), you’ll owe an insurance premium at closing as well as annually. Depending on the size of your down payment, you may eventually be eligible to cancel the insurance.
Now that we’ve laid out the four components of a monthly mortgage payment, you should have a better idea of where your money goes. At BayCoast Mortgage, we are ready to assist you with your mortgage needs, as you search for the home of your dreams. Get in touch with us today, and we’ll walk you through the process, step-by-step, giving you the information you need on your journey to homeownership.