What Do First-time Homebuyers Need to Know About PITI?
First-time homebuyers are often advised to shop for a mortgage lender to possibly get the most competitive offer they can comfortably repay. Homebuyers will encounter “PITI” or Principal, Interest, Taxes, and Insurance when they receive a loan estimate from several mortgage lenders.
It’s important for first-time homebuyers to understand PITI mainly because this will give them a clear picture of how much monthly payments they need to make during the whole term of their mortgage. Homebuyers who shop for a mortgage can find the PITI under the Projected Payments of the loan estimate’s first page.
Basically, PITI is where monthly mortgage payments go to be applied between the Principal, Interest, Taxes, and Insurance; it’s one of the common mortgage acronyms first-time homebuyers need to know.
Principal – is the amount of money homebuyers are about to borrow from a mortgage lender to buy a home. The principal could vary depending on how much down payment a homebuyer paid. If a homebuyer plans to take out a conventional loan to buy a $300,000 home and plans to put a minimum of 3 percent down payment (or $9,000), the amount of principal he or she is about to borrow is $291,000. The principal typically will be reduced as homebuyers repay their monthly mortgage. In some situations, homebuyers may want to make additional payments or prepayments if they want to significantly reduce their principal, and at some point, request to remove their mortgage insurance which is a requirement when putting a down payment below 20 percent.
Interest – is the cost borrowers will agree to pay for borrowing money or principal. Mortgage lenders typically earn from the interest rates they charge to borrowers. Homebuyers consider shopping for a mortgage so they can get the most competitive interest rate a lender could offer. Homebuyers could choose if they want to get a fixed interest rate or an adjustable interest rate. Often expressed in percentage, mortgage interest rates could vary from one homebuyer to another. Generally, lenders tend to offer the most competitive mortgage interest rates to borrowers whom they consider as low risk. When homebuyers start the term of repaying their monthly mortgage, the bulk of their payments could go to the interest rate and then the principal.
Taxes – are the cost every homeowner requires to pay for owning a piece of the American dream. Often called property taxes, these taxes are used for community developments. Most mortgage lenders will require homebuyers to open an escrow account to ensure they’re timely repaying their obligations to the government. Every year, the average household pays more than $2,200 worth of property taxes. Property taxes could vary depending on the location where an individual plans to buy a home.
Insurance – is another cost every homeowner is required to pay. Mortgage lenders often require homebuyers to have updated homeowners’ insurance to protect the property, home furnishings, and other assets inside the home. The average annual homeowners’ insurance premium is $1,192 according to the National Association of Insurance Commissioners. In some states, mortgage lenders may require homebuyers to have additional home insurance policies that could cover the property in the event of floods or wildfires. It’s important for homebuyers to note the difference between homeowners’ insurance and mortgage insurance. Homeowner’s insurance provides protection to the property while mortgage insurance provides protection to the mortgage lender if a borrower who puts a down payment below 20 percent can no longer repay the monthly mortgage. Like property taxes, payments for homeowners’ insurance are also held in an escrow account until the bill is due and paid to the insurance company.
PITI tips first-time homebuyers may consider
Homebuyers should note that all the figures in the loan estimate, including PITI, should reflect the things they’ve discussed with a loan advisor and it’s important to find out if they think something has changed with the loan estimate. If the loan estimate doesn’t offer an escrow account to hold property tax and insurance payments, homebuyers may find it ideal to shop for an escrow company or get a referral from the mortgage lender they plan to pursue their transaction.
When shopping for a mortgage, homebuyers can have an idea of the monthly payments they need to make by understanding the Principal, Interest, Taxes, and Insurances in the loan estimate they get from mortgage lenders. Through PITI, homebuyers can have an idea if they can comfortably repay the mortgage they would take.