What does “PITI” mean?
Lots of borrowers are unsure what “PITI” means when it comes to their home loan. PITI is a common term used within the mortgage industry to describe the four factors that impact a loan. PITI (pronounced “pity”) stands for:
- Principal
- Interest
- Taxes
- Insurance
Principal
Principal refers to the actual amount of money that is being borrowed. A borrower’s loan principal is paid back over the course of the loan’s life (30 years, 15 years, etc.). Whenever a borrower makes a mortgage payment, a portion of that payment goes towards the principal balance of the loan.
Interest
Interest refers to the money paid by the borrower at a rate determined by the loan type (either fixed or adjustable) for the use of borrowed funds for their loan. Interest payments are included in a borrower’s mortgage payment.
Usually, when a borrower first starts to make repayments on their loan, the majority of the payment goes towards paying the monthly interest, with the rest going towards the principal balance.
As the principal balance decreases, the interest payments will also decrease. Mortgage payments will begin to be paid more towards the principal and less towards the interest payment.
Taxes
California borrowers must pay property taxes in addition to their loan payments. Property taxes are paid twice per year: February/April and again in November/December. We usually estimate the property taxes to be around 1.25%. This estimate can vary depending on any additional taxes assessed by the city and the county may have for schools, roads, and other public goods. For example, property taxes in Oakland and Berkeley are higher than average, around 1.64%.
Property taxes are paid through an Escrow Account in California. Escrow Accounts are typically funded each month whenever a borrower makes a mortgage payment.
Insurance
Insurance can refer to home insurance, mortgage insurance, or even both.
Home insurance is a specific type of insurance that is designed to protect borrowers against losses or damages caused to their home by natural disasters (fires and storms), burglary and vandalism. Home insurance will also protect borrowers from any legal fees associated with injury on the insured property.
Unless a borrower is purchasing a home without the use of a lender, they are required to get home insurance. If the property is in a designated flood zone, they will also be required to get flood insurance.
Borrowers are also generally required to pay for mortgage insurance if their down payment is less than 20% of the purchase price or their loan-to-value (LTV) ratio is more than 80%. Mortgage insurance for conventional loans is also known as “Private Mortgage Insurance (PMI).” Mortgage insurance is designed to protect the lender from possible borrower default.
The payments for these policies are usually spread out over the course of the year (or however long the policy is in place for) and do not get paid through an escrow account.
Questions? This article covers the very basics of PITI for California borrowers, but we can provide additional information to those who request it. You can reach us here, or at (925) 855-4491 or [email protected].
