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How much PITI Can You Afford to Pay?

Principal, interest, property taxes and insurance, abbreviated PITI, are the four components of your monthly mortgage payments.

The PITI is used in two ways:

1. When you apply for a mortgage loan, lenders will plug each of the components of your expected mortgage payments into specific lending ratios.
2. When you have closed escrow and mortgage payments begin, the lender collects the principal and interest on the mortgage, both of which contribute to the amortization of your loan.

Amortization is the process of paying off a loan. The lender puts into a second escrow account the monies for property taxes and insurance.

Components of Your Mortgage Payments

The following list explains the four aspects of your mortgage payment.

Principal

This is the value of your loan. It does not include interest, monies allocated to property taxes or insurance.

Interest

This is a percentage of the mortgage and is based on current interest rates. If you choose an adjustable rate mortgage (ARM), the interest rate will fluctuate. However, the change won’t affect your monthly mortgage payments. In the early part of your loan, the majority of each of your mortgage payments goes to interest, with very little going to amortization of the principal. Use an amortization calculator to see how much the total cost of your loan would be at the end of the term.

Property Taxes

This differs depending on location and includes state and municipal property taxes. Your property taxes are based on the value of your property.

Insurance

The type of insurance you will need to carry also differs depending on location. Your mortgage payments may include payment for more than one type of insurance. Types of insurance that may be included are:

• Private mortgage insurance (PMI) to protect the lenders against default
• Homeowners insurance to protect personal property
• Supplemental insurance to protect against natural disaster.

The Mortgage Calculator

Now that you understand the various aspects associated with mortgage payments, you should take time to decide how large of a mortgage you can afford. In the past, prospective borrowers could only figure out their mortgage payments using a mortgage calculator on a loan officer’s desk. Now, you can handle the entire process on your own with an online mortgage calculator.

Mortgage calculators provide you with an estimate of what your mortgage payments would be, as well as how much the amortized amount (the total amount paid at the end of the mortgage term) will be by using the appropriate mortgage calculator.

Online home mortgage calculators can help you answer the following questions:

• How much can I borrow?
• How much will my mortgage payments be?
• What will my adjustable rate payments be?
• What will the Annual Percentage Rate (APR) be?
• Should I pay points to lower the interest rate?
• Which is better – a 15 or 30-year term?
• Am I better off renting?
• Which loan is better?
• Are extra mortgage payments a positive?
• What will the amortized cost of the mortgage be?
• How much can I afford?
• How can I estimate my current credit score?

Common Mortgage Payment Calculator Variables

The following terms lay out some of the factors that mortgage calculators use to tabulate various aspects of your mortgage payment:

• Principal: This is the total amount of the home cost, less your down payment. For instance, if you wish to buy a $300,000 home and have a down payment of $15,000, your mortgage principal will be $285,000.
• Interest: Home loans aren’t free. Expressed as a percentage, this variable is the interest you will pay on the mortgage principal. Your credit score will have a significant impact here.
• Term: Typically expressed in months, the term of most home loans is spread over 30 years, or 360 months. While amortizing over a shorter period can significantly reduce the total amount of interest paid during the life of the loan, it will also cause your mortgage payments to increase.

Early Amortization: Making Extra Mortgage Payments

Early amortization of a loan (paying off a loan before it’s due) can be accomplished by paying additional money towards the principal. You can do this by adding a little extra onto your monthly mortgage payments, or making extra mortgage payments during the course of the year.

Because your initial mortgage payments are almost exclusively interest, with a specific amount set aside to pay your insurance premiums and property taxes, precious little goes towards mortgage amortization. Substantial interest savings are possible with additional mortgage payments towards the principal early in the loan repayment cycle. Check with your lender to see if your mortgage has a pre-payment penalty.