Lessons in Loan Lingo: What's a PITI?
My first experience with PITI was in a meeting with a mortgage broker. She said the word a few times; but it was new to me (like everything else about mortgages) and she was throwing around a lot of lending lingo. I couldn’t grasp the context and had almost no idea what she meant. I kept thinking of a small pit bull, aptly named “Piti.”
In realty, PITI is an acronym, standing for
- P — Principal
- I — Interest
- T — Taxes
- I — Insurance
These are the four parts of a mortgage payment. The principal, or the original dollar amount of money you borrowed, plus the interest on that money make up the clearest part of that payment—at least to us new homebuyers. We understand we must pay back what we borrowed, and that bank will make a profit at whatever interest rate we’ve agreed to in our loan. Less clear are the other two parts: taxes and insurance.
The tax man shall come for your property taxes. As a new homeowner, you’ve never had to pay these before and the additional expense is hardly a welcome one. But property tax is complicated. Keep in mind that your taxes are pro-rated the first year you buy a home. So, if you close on a house say in April, you’ll be on the hook for the remaining taxes for that calendar year (The seller will have already paid through April). Your lender will most likely give you the option to pay the taxes up front or to wrap them into the loan. Now you see the “T” in PITI, as your property taxes add into the monthly payment.
Some people opt to pay the taxes up front, thus reducing their monthly payments. The disadvantage to this, of course, is that you’d have to continue saving --and then paying --that big wad of cash every year. Also, your lender may not offer you the same deal if you pay them up front. Our broker, for example, told us if we wanted to “waive reserves,” we’d incur additional charge of .25% to the discount points we’d purchased. In the end, we opted to wrap the taxes. We’d just spent more money than we’d ever spent in one sitting: home inspection, appraisal, down payment, and closing costs. We were frankly glad no to have to pay another big fee right away.
Banks obviously want to protect the investment they’ve made in your home, so you must obtain acceptable home insurance and prove you’ve done so with documentation before you’ll get your loan. Then the monthly fee for that insurance becomes part of your house payment. You have a chance to save some money here, if for instance you bundle your car and home insurance together with the same company. My husband and I did just that—dropped our separate auto policies and took out a new policy for both drivers and the house. The auto went down $400 a year, so even adding in the new $115 home insurance premium, we still saved money overall.
So Who Pays the PITI Now?
Well, you do, but not in the active way you’re used to paying bills. The “reserves” my lender was referring to are actually an account set up by the lender that collects money (from your payments) and holds them. Taxes and insurance get paid from this reserve account, which grows as you make your monthly payments. When your taxes and insurance are due, your loan servicer pays them for you, using that money.
Watch Your Balance
Your lender is required to send you periodic statements of account, and you can use these to track how much money is going into reserves. You can also compare the reserve payments with your property tax bill and insurance premiums, to make sure the amount your paying into reserve for these expenses is correct.
The lender/servicer sends you a periodic statement showing how much is in this account. That way, you can compare the statement with your property tax bill and your homeowner’s policy to ensure that the right amount is being held to cover the payments.
Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert.