During your ventures you will probably hear this term used a lot. It stands for principal, interest, taxes and insurance. Every loan includes principal and interest payments and those labeled PITI also include taxes and insurance. Property taxes and homeowners insurance payments can be paid in an annual lump sum. PITI means that these payments are instead spread out over the year and included in each mortgage payment.
Because mortgages are such loans paid off over a period of fifteen to thirty years then the monthly payments comprise all or some of the following five components:
- Principal – the actual loan balance.
- Interest – the interest you owe on that balance.
- PMI
- Real Estate Taxes – assessed by different government agencies to pay for school construction, fire department service and other facilities.
- Property Insurance – insurance coverage against theft, fire, hurricanes and other disasters.
With PITI you essentially ‘escrow’ your tax and insurance payments, meaning that the amounts are tacked on to your monthly mortgage payment so that they are covered when the tax or insurance bill comes in. You can also opt to pay the latter in full when they come due rather than in monthly installments to the escrow account which is also known as an ‘impound’ account.
