When renting an apartment or home, you make a single monthly payment that goes directly into your landlord’s pocket every month. Many families buy a home to build their own equity and wealth instead of someone else’s.
Your monthly mortgage payment is broken into 4 parts. How much you pay into each of these parts depends on a variety of factors, such as where you live, your loan-to-value ratio, and your interest rate. This may be confusing at first glance, but fortunately, you do not need to be a mortgage expert to understand where your payment goes each month.
You just need to remember these 4 letters: PITI.
PITI is the acronym that describes how your payment is broken down each month. These letters stand for:
This is the current balance of your loan. When you first buy your home, you can think of this as the price of your home, minus your down payment (not including closing costs). As you make payments every month, this balance will go down.
Depending on your amortization schedule and interest rate, it is common for this payment to make up a small portion of your overall mortgage payment. As you pay the balance down, the amount applied to the principal each month will increase and build equity.
Interest is the monthly fee you pay for financing your home. Similar to credit cards, auto loans, or any other type of money you will borrow, there is a cost to borrowing that money.
While your interest rate will play a factor in your monthly payment, it is important to work with a lender that is transparent about all parts of your loan. Understanding both the monthly and lifetime costs of the loan will help you make informed decisions about your financing.
Real estate taxes are a yearly payment that is collected as monthly installments and held in your escrow account. The amount you pay will vary from area to area, and your lender will be able to tell you this cost before you start your home search. This factor alone determines where many homeowners buy and is something to keep in mind as you shop for a home.
Insurance is the final “I” in the PITI acronym. Most lenders will require you to keep homeowner’s insurance on the home. This helps protect your home in case of damage (such as a fire) that makes the home unlivable and with an outstanding balance of a home you can no longer use.
Another type of insurance your lender may require is Mortgage Insurance.
This is different from homeowner’s insurance (which protects you) as this is insurance in case you, as the borrower, default on the loan (protecting the lender). This is typically for riskier borrowers, such as those who put less than 20% down or use the FHA loan type.
If you are curious about the mortgage process or how your payment will work, click here and schedule a time to speak with our trusted mortgage advisors to determine which option is the best match for your borrower profile.