What is PITI and How Does it Affect a Home Loan Payment?

Your home mortgage payment can basically be lumped into four kinds of costs:

These forecasts are sometimes referred to off-the-cuff as PITI, and the evaluation of these costs can profoundly impact your monthly payment.

Obviously, the most critical component of the PITI is your principal. If you borrow $500,000 in principal, you will need to pay that money back either in small, evenly spaced increments or in bulk at various points along the term of your mortgage.

If you put a lot of money “down” at the beginning of your mortgage to chip into the principal, you will come away with lower interest rates. If you choose an interest-only mortgage or an adjustable rate mortgage with low early term payments, you'll have to make up the bulk of the balance down the line.

Your property taxes and insurance aren't necessarily affected by the cost of the principal and the amount you're paying for interest. However, if you buy a house in a “luxury” neighborhood, or if you make improvements to the property after the fact, your property taxes may go up.

Similarly, if you live in an area that's prone to a natural disaster of some sort -- on the coasts, in a flood zone, near a forest where dangerous conflagrations have occurred in the near past -- your hazard insurance will likely be high.

You can employ what's known as a home loan calculator to determine what kind of monthly payment you can afford. Once you have this figure, you can “back calculate” to see what kind of principal you can afford given the current market interest rates, your credit history, your employment track record and forecast, and several other variables which your lender or broker can explain to you in greater detail.

You can fiddle with components of the PITI individually or play them off each other (e.g. adjust the balance to get a lower interest rate, or adjust the type of mortgage, so that you can pay off the balance over a longer term and thus save on your monthly expenses) to brainstorm possible long-term housing budgets.