Your mortgage closes successfully and you now live in a home that you can call your own. After the long, tedious buying process, you now enter mortgage servicing phase, taking aside a significant portion of your income every month to pay for your mortgage.
What is PITI?
But do you know what constitute your monthly mortgage payment? Well, your payment has basically four parts, commonly abbreviated as PITI – Principal, Interest, Taxes, and Insurance. Here are the detailed descriptions of these four components.
Principal
This refers to the amount that you borrowed from the lender and used along with the down payment to buy your home. In the beginning, only a small portion of your payment has the principal part as a large portion of your payment goes towards interest payment. If you look at the amortization table, the principal part begins to grow rapidly only after a few years, say 5 or 10 years depending upon your mortgage term. The more you pay against the principal part, the faster you will build equity in your home.
Interest
The interest is the running cost of borrowing that goes to the lender or whoever services your loan. Investors who have funded your mortgage are the recipient of a major portion of interest you pay every month. In the initials months, your payments have interest as the single most major component. As you keep paying, the interest portion diminishes, slowly in the first half of the mortgage term and more rapidly towards the end of term.
Taxes
Your payment also comprises property taxes that are due on you every year. Typically, the lender takes a twelfth of the taxes every month and keeps them in an escrow account to be paid later when they are due. Taxes remain the same no matter which lender you choose and do not usually change during the term of the loan.
Insurance
While the homeowner’s insurance is mandatory for every borrower, the private mortgage insurance may become necessary in case of a lower down payment.
Homeowner’s Insurance
Your payment includes 1/12th of the annual homeowner’s insurance premium, which is put into an escrow account to be paid later when it is due. Depending upon the lender, you may be allowed to shop for the low-premium homeowner’s insurance on your own.
Private Mortgage Insurance (PMI)
Your lender may want you to buy PMI if you are short of requisite down payment, which is typically 20% of the loan amount. If your payment includes the premium of this insurance product, the money will be put into an escrow account, just like taxes and homeowner’s insurance.
Other Components of a Mortgage Payment
Besides, your payment may include many other fees and charges, depending upon a number of factors. Some of these components are being mentioned here.
Escrow
You know what an escrow account is. Your lender puts parts of your payment in escrow to pay for taxes and insurance when they are due. The escrow is typically a third-party company, which specializes in holding documents or money and produces the same when they are needed. Sometimes, an escrow account is held by the lender or servicer.
HOA
As a homeowner, you may have to pay for the maintenance of neighborhoods and condominiums. Abbreviated for Homeowner’s Association, HOA helps maintain common areas, manage trash and snow removal, cover other expenses and enforce regulations set forth by the neighborhood or condominium developer.