Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowners and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
The interest portion of PITI is paid in arrears. In other words, the interest amount has been earned by the bank in the prior month. The principal portion is paid to reduce the balance. With a lower loan balance, a lesser amount of interest is charged in the following month, and a bigger portion goes towards paying down the principal. This is the basic principle of "amortization", paying the same amount (assuming the interest rate never changes during the loan term) periodically to pay off the mortgage at the end of the loan term.
PITI is the combined monthly housing expenses. Although it only stands for principle, interest, taxes, and insurance, it will also include any Homeowners Association dues that you must pay.
Principal is the amount borrowed against the home. It is the amount that will be reflected in the mortgage Lien as well. As a fully amortized mortgage matures, the Principal balance grows smaller.
PITI is typically quoted on a monthly basis and compared to a borrower's monthly gross income by means of computing the individual's front-end and back-end ratios, which are used to approve mortgage loans. Generally, lenders prefer the PITI to be equal to, or 28%, of a borrower's gross monthly income.
Always remember on a purchase to ask what the tax and insurance figures will be so that you are not
surprised when the debt to income ratios are calculated by your lender.
Just because the total PITI amount is used to qualify you for your loan and the amount is expressed in several areas on your loan application, it does not necessarily mean that your payment will include impounds for taxes and insurance. You must request your loan officer to include impounds in your loan although some loan programs may require them.
