When you take out a mortgage on a home one of the first acronyms that you’ll probably hear is “PITI.” Used in relation to mortgages, PITI stands for “principal, interest, taxes and insurance” – or the four elements that will make up the mortgage payment on your new home.
You’ll have the option of paying only principal and interest (P&I) on a monthly basis – and then covering your tax and insurance bills when they are due – or paying a single monthly payment to cover all four components of your mortgage. It’s important that you know exactly what is and isn’t covered in the loan quote that you receive from your lender. You don’t want to find out later that you’re unknowingly responsible for the “T&I” portion of the payment!
With PITI, the lender (to whom you will make a total monthly payment) collects and then holds the taxes and insurance portion of that payment in escrow until those bills are due. Check with your insurance provider and local taxing authority for specifics, but in most cases the former will be due on an annual or biannual basis, the latter will have to be paid yearly.
Here are a few important tips to keep in mind about your mortgage payment:
Lenders use PITI for loan approvals. Even if you decide to pay your taxes and insurance on your own, the PITI payment is the amount used for your mortgage loan approval.
The T&I component may not be constant. Your monthly mortgage payment may not fluctuate over the life of your loan, but your tax and insurance obligations likely will. When your property is reassessed by the county or city where you reside and/or as insurance rates go higher, your T&I will adjust accordingly.
Stay on top of the T&I changes. Don’t wait until the lender sends you an updated picture of your “new” monthly payment. Pay attention to the “tax-appraised home value” that you’ll receive annually and/or homeowner’s insurance notices that you get in the mail and budget accordingly.
Make sure you’re ready when the bills come. Depending on your location, both insurance and property taxes can be significant obligations. If you’re not using the 12-month installment PITI plan to cover these expenses, be sure to budget accordingly so that you don’t get overwhelmed when the bills hit your mailbox.
Don’t forget about the other costs of homeownership. Homeowner’s association fees, utility costs, ongoing maintenance costs and moving expenses should all be factored into the equation. You can use Wells Fargo’s Budget Worksheet or Freddie Mac’s Home Budget Worksheet to shore up the financial aspect of your homeownership journey.
This article has been prepared for informational purposes only. The accuracy and completeness of this information is not guaranteed and is subject to change. Since each individual’s financial situation is unique, you need to review your financial objectives to determine which approaches might work best for you.
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