HACK 232 Figure Out Your PITI

The people who tell you that you could have a monthly mortgage payment for less than your rent may not be looking at the right numbers. To get a better idea of how much buying a home would really cost each month, you need to know your PITI:

• Principal: The monthly main amount you pay on your mortgage (the part that makes the amount you owe go down).
• Interest: The monthly interest you pay on your mortgage loan (this gets rolled together with the principal for your overall mortgage payment).
• Property Tax: The taxes you pay on your home to your local government. The payment schedule depends on where you live, but the first few months usually get rolled into your closing costs. Often, you pay this as part of your bigger mortgage payment and your lender submits it to your city when due.
• Insurance: This is either your homeowners insurance or your homeowners association fee. If you’re getting insurance for a home that’s not in an association, you will need to pay up front for the first year, but you may be able to shift to monthly payments after that first year.

Why is it important to know how these four items add up to your monthly homeownership costs? Because if you don’t know your PITI, you could be getting in way over your head in a house you can’t truly afford. Lenders want to see your PITI as 28 percent or less of your income. And let’s face it—you don’t want the costs of owning a home to eat into your budget by too much more than that anyway.