When it comes to paying your monthly mortgage, it's more than just a large sum of money leaving your account. It's actually made up of four distinct components: principal, interest, taxes, and insurance, which is commonly referred to as PITI. It may not have the catchiest name, but it's the key to understanding your mortgage payment.
The principal is the amount of money you borrow to purchase your home. This amount varies depending on the purchase price of the home and the amount of your down payment. Your monthly mortgage payment will go towards paying off the principal, which reduces the amount of debt you owe.
Interest is the fee you pay for borrowing money. It's essentially the cost of the loan. The interest rate on your mortgage will be determined by a number of factors, including your credit score, the size of your down payment, and the current state of the housing market.
Taxes are property taxes that are assessed by the local government and are based on the value of your home. These taxes are typically paid annually, but are often included in your monthly mortgage payment so that you can spread out the cost.
Homeowners insurance is a type of insurance that protects your home and belongings in the event of damage or theft. Most lenders require you to have homeowners insurance, and the cost is typically included in your monthly mortgage payment.
Benefits of understanding your mortgage payments:
Budget for the true cost of home ownership:
It's because knowing the breakdown of your monthly mortgage payment can help you budget for the true cost of homeownership. It's not just about the price of the home itself, but also the ongoing costs of maintaining and insuring it.
Compare loan options
Understanding PITI can help you compare different mortgage options. For instance, if you're deciding between a 15-year or 30-year mortgage, you can use PITI to compare the total cost of each option over time. A shorter loan term will mean higher monthly payments, but less money paid towards interest over the life of the loan.
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