What Is Included in a Mortgage Payment? PITI Explained

The four parts of PITI

• Principal is the part of the payment that reduces the amount you borrowed.
• Interest is the lender's charge for the money, calculated on the balance still owed.
• Taxes are property taxes charged by local government, usually based on the assessed value of the home and a local rate.
• Insurance is homeowners insurance, which covers damage to the property, and sometimes other required cover.

Principal and interest together are called P&I. On a fixed-rate loan, P&I stays the same for the whole term. Taxes and insurance are different: they depend on outside decisions, so they tend to change over time.

A worked monthly example

Example: a home priced at 400,000 with a 20% down payment. The deposit is 80,000, so the loan is 320,000, at 6.5% over 30 years.

1. P&I: using the loan payment formula, 320,000 at 6.5% for 360 months comes to 2,022.62 a month.
2. Property tax: assume an annual tax of 1.1% of the price, which is 4,400 a year, or 4,400 ÷ 12 = 366.67 a month.
3. Insurance: assume 1,800 a year, or 1,800 ÷ 12 = 150.00 a month.
4. Total: 2,022.62 + 366.67 + 150.00 = 2,539.29 a month.

The assumed tax rate and insurance cost are placeholders. Replace them with real quotes for the area and property you are considering, because the same loan can have very different totals in different places.

How escrow works

Many lenders ask for tax and insurance to be paid into an escrow account along with each payment. The lender holds the money and pays the bills when they fall due. This protects the lender's interest in the property and spares you from large lump-sum bills.

Because the escrow part depends on the actual tax and insurance bills, your total payment can rise or fall even on a fixed-rate mortgage. A reassessed home value, a new tax rate or a higher insurance premium all flow through. This is a common reason a payment changes when the interest rate has not.

Down payment and mortgage insurance

A smaller deposit means a larger loan. With 10% down on the same 400,000 home, the loan is 360,000 and P&I rises to 2,275.44, which is 252.82 a month more than in the 20% example.

In the US, a conventional loan with less than 20% down usually also comes with private mortgage insurance, and other loan programmes have their own forms of mortgage insurance. This is an additional monthly cost that protects the lender, not you, and its amount depends on the loan and the borrower. If you are weighing deposit sizes, ask for a quote that includes it.

Use the percentage calculator to turn a price and a deposit percentage into amounts, and the loan calculator to see how the P&I part changes with the loan size.

Fixed or adjustable rate

With a fixed-rate mortgage the interest rate, and therefore the P&I figure, is set for the whole term. With an adjustable-rate mortgage the rate is usually fixed for an initial period and then resets from time to time according to the loan's terms, so the P&I part can rise or fall.

If you are considering an adjustable loan, ask how often the rate can change, what it is linked to, and whether there are limits on how far it can move in one step and over the life of the loan. Then calculate the payment at a higher rate as well as the starting one, so you know what the worst case in the contract would mean for your budget.

Costs outside the payment

Even PITI does not cover everything about owning a home. Some costs sit outside the monthly mortgage figure but still belong in your budget:

• Homeowners association or similar fees, if the property has them.
• Maintenance and repairs, which are irregular but unavoidable.
• Utilities, which are often higher than in a smaller rented home.
• Closing costs and moving costs at the start.

This article is general education, not financial advice. Mortgage rules, taxes and insurance requirements differ by country and lender, so confirm the details with a lender or qualified adviser.