Buying and moving into a new home is one of life’s great experiences, especially if you’re buying your first home. From getting that pre-approval to the “yes!” response on an offer to closing and moving in, every step is exciting. And while the process is engaging and fun, it’s important to prepare for moving day […]
P.I.T.I: Understanding the four parts of your mortgage payment
If you plan on purchasing a home, you will likely take out a home mortgage. Since your monthly mortgage payment is a combination of four charges bundled into one, it’s essential to understand each element of your overall payment and how it can fluctuate over time. Using the acronym P.I.T.I. can help you remember.
P.I.T.I is short for:
The principal is the actual amount you borrowed from your lender. For a fixed-rate mortgage, your mortgage payments will primarily be put toward paying interest in the first years of your loan. Over time as you pay down principal, you’ll owe less interest.
Interest is the amount charged for borrowing funds to purchase a home. The interest you pay each month will be determined by your mortgage rates and can be either fixed or variable. It’s a percentage of the outstanding principal, which is the amount on the loan that still needs to be repaid.
As a homeowner who makes regular payments, you can claim mortgage interest on your taxes.
Since these values can change over time, it’s a good idea to watch your home’s assessed value and local tax policy. The portion of your monthly mortgage payment associated with taxes and insurance will be held in escrow until it’s due.
When you buy a home with a mortgage, you will be required to purchase a homeowner’s insurance policy. Most borrowers are supposed to carry a homeowner’s insurance policy until their home is paid off in full. You may also need private mortgage insurance depending on the size of your down payment. This factor will also be added to your mortgage payment.