The monthly expenses that go along with homeownership include more than the loan principal and interest. PITI is the acronym that is most often used for the total amount of your mortgage payment, making up the most significant monthly expense of owning a home.
PITI stands for principal, interest, taxes, and insurance. Factor in all of these components when getting pre-approved for your loan so you get an accurate representation of what your monthly payment will be.
The principal amount of the mortgage payment goes towards repaying the amount you borrowed for a loan. While your total monthly payment does not change month-to-month, the amount you pay towards principal and interest changes over the course of the loan term. This is known as amortization. In the beginning, a larger amount is allotted to the interest. Toward the end of the loan, the amount going to the principal increases.
Interest is another component of your monthly payment; one that gets a lot of attention while securing a mortgage loan. The interest is a fee you pay for borrowing money to purchase a home and is calculated as a percentage of principal borrowed.
Mortgage rates rise and fall with the market. Buyers with excellent credit can generally obtain lower interest rates than those with decent credit scores. As you near closing date, you will lock in your interest rate so that it stays the same for the entire term of your loan (with a fixed mortgage rate).
Property taxes are also included in your monthly mortgage payment, as assessed by the local government. The assessed value of the home determines the amount of taxes paid, and can change year-to-year, or whenever the government assesses the value of homes. Review the history of property taxes to get an idea of how much you will be paying in taxes each year.
Homeowner’s insurance is the last component of your monthly payment and includes Private Mortgage Insurance (PMI) when required. Homeowner’s insurance is required with a mortgage and provides coverage in the event of damage to the property. If flood insurance or earthquake insurance is required where you live, that becomes a separate policy.
In addition to PITI, you need to factor in other monthly expenses, including utilities, homeowner association fees (when applicable), and regular maintenance on the house and property. Knowing your total monthly budget, and reviewing this with your mortgage lender, will help you determine how much home you can afford.
Questions on your monthly budget? Contact NEHM!