Mortgage Loan: PITI Explained |
By Louie Latour |
|
If you are shopping for a mortgage loan you have probably seen the
acronym PITI in many of the loan offers you receive. PITI stands for
principal, interest, taxes, and insurance. Here is what you need to
know about PITI.
Principal
Mortgage principal is the
total balance of your loan. When you make your monthly mortgage
payments you are gradually paying down this balance along with the
interest due for that month. Mortgage loans are front loaded with
interest so in the early years of your mortgage you will find very
little of your mortgage payment is being applied to the principal
loan balance. The interest paid on any given month is based on the
outstanding principal balance; as the years go by more of your
payment is applied to the principal balance and less is paid to the
lender as interest.
Interest
Interest is what you pay
the lender for loaning you the money to pay for your home. The
interest is a percentage of the principal balance due. Interest
rates come in two flavors: fixed rates that do not change over the
term of the loan, and adjustable interest rates that change at
regular intervals set in your loan contract. If you have an
adjustable rate mortgage your interest rate is tied to some
financial index plus the lender's markup. When the lender
periodically updates your interest rate the amount of your monthly
mortgage payment will change with it.
Taxes
Property
taxes are often included in your monthly payment amount. Lenders do
this to protect their investment in your home; if you allow your
property taxes to lapse, your State or local government could put a
lien on your home. If this happens the lender would be unable to
foreclose if you fall behind on your payments.
Insurance
Your homeowners insurance policy protects your home from damages.
Insurance premiums can be rolled into your monthly payment like
property taxes; again, lenders do this to protect their interest in
your property. Most homeowners insurance policies only protect your
home against fire, vandalism, and certain other damages. If you live
in an area prone to flooding the mortgage lender could require you
to purchase flood insurance in addition to your homeowners policy.
Mortgage lenders may require borrowers with poor credit or low down
payments to purchase Private Mortgage Insurance in addition to their
homeowners policy. Private Mortgage Insurance protects the lender
from loses in the event of foreclosure. This insurance does nothing
to protect you, the homeowner.
To learn more about shopping
for the right mortgage and avoiding common mistakes, register for a
free mortgage guidebook using the links below. |
|
|
|
|
|
