Demystifying Your Mortgage Payment (PITI)
When you write a check for your mortgage, you aren't just paying back the loan. A standard mortgage payment is made up of four distinct parts, commonly referred to by the acronym PITI:
- Principal: The portion of your payment that pays down the actual money you borrowed. In the beginning, this is very small.
- Interest: The profit the bank makes for lending you the money. In the beginning, this makes up the majority of your payment.
- Taxes: Property taxes charged by your local government. The lender usually collects this and pays it for you via an Escrow account.
- Insurance: Homeowners insurance to protect against fire, theft, and damage. Also typically paid via Escrow.
Hidden Costs: PMI and HOA
Beyond PITI, there are two other costs this calculator allows you to add:
- HOA Fees: If you live in a community with a Homeowners Association, you must pay monthly dues for shared amenities. These are usually paid separately, not to your lender.
- Private Mortgage Insurance (PMI): If you put down less than 20% of the home's value, lenders usually require you to pay for insurance that protects them in case you default.
30-Year vs. 15-Year Mortgages
The most common debate in home buying is choosing the loan term.
30-Year Fixed
Offers the lowest monthly payment, allowing you to buy "more house." However, you will pay significantly more interest over the life of the loan.
15-Year Fixed
Has a higher monthly payment, but you secure a lower interest rate and pay off the home in half the time, saving tens of thousands in interest.
Frequently Asked Questions
How much house can I afford? ▼
A general rule of thumb is the 28/36 rule. Your housing costs (PITI) should not exceed 28% of your gross monthly income, and your total debt payments (housing + cars + credit cards) should not exceed 36% of your gross income.
How can I lower my monthly payment? ▼
You have three main levers: Price (buy a cheaper home), Down Payment (put more money down to reduce the loan size), or Interest Rate (improve your credit score or buy "points" to lower the rate). Extending the term to 30 years also lowers the payment but increases total cost.