It is easy to sometimes get lost in the world of real estate terminology.  That’s why each week I blog to explain different terms and vocabulary that you should understand when buying or selling a home.

This week is focused on the term “PITI.”

This is a term that is vitally important to buyers!  PITI stands for:

• Principal
• Interest
• Taxes
• Insurance

Let’s look at each of these.

Principal and Interest are related to the loan itself.  The principal is the amount borrowed, and interest is what the lender charges you for the loan.  In each monthly payment, some amount goes toward principal and some amount goes toward interest.  In the early years of the loan, the majority goes toward interest and a smaller amount toward principal.  The amounts slowly reverse as you pay down the loan (in a later post, I will dig into “amortization”).

Taxes and Insurance are, of course, items for which you are responsible for as a homeowner.  However, you may wonder how they relate to your monthly payment.  Each month, you will pay additional amounts to the lender, which in turn are used to pay the taxes and home insurance policy on behalf.  These additional amounts are determined by dividing the estimated taxes and the cost of the insurance policy into 12 payments.  These may change from one year to the next if the taxes increase or the price of the insurance policy changes.

When you combine all four of these items together, they make up your PITI or total monthly mortgage payment.