What does PITI stand for in mortgage payments?

PITI stands for Principal, Interest, Taxes, and Insurance, which are the four components that typically make up a monthly mortgage payment. Understanding these elements is crucial for borrowers, as they provide a comprehensive view of their financial obligations related to homeownership.

• Principal is the amount of money borrowed to purchase the home, and it represents the portion of the payment that reduces the loan balance.

• Interest is the cost of borrowing that principal amount from the lender, calculated as a percentage of the outstanding loan balance.

• Taxes refer to property taxes imposed by local authorities, which pay for essential services and infrastructure in the area. These are often escrowed into monthly payments.

• Insurance typically refers to homeowners insurance, which protects against damages to the property, and may also include mortgage insurance if applicable, especially for loans with less than 20% down payment.

Each component plays a significant role in the total monthly mortgage payment, making it essential for prospective homeowners to understand what they're committing to financially. This knowledge helps individuals budget effectively and ensures that they are prepared for all aspects of homeownership costs.