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What Is PITI, and Why Is It So Important for Home Buyers to Know? – The Motley Fool

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Don’t get caught off guard by the extra financial obligation…….

Image source: Getty Images

Don’t get caught off guard by the extra financial obligations of homeownership.

Key points

  • If you’re buying a house, you need to be prepared for how much your new property will cost you.
  • Principal and interest are not the only major expenses you’ll have.
  • PITI is an acronym that helps you remember the different homeownership costs.

For many homeowners, some of the costs of ownership come as a surprise. While you’re probably aware of the fact you’ll have a new home loan to pay for, your expenses go beyond just the amount you need to pay off your mortgage.

You don’t want to be one of the many who is caught off guard by the extra financial obligations you’re taking on when you own your own place, so it can be helpful to understand four of these key costs up front. Fortunately, there’s a simple acronym that’s used to help you remember the biggest costs that you’ll have as a new homeowner. It’s “PITI,” and stands for “principal, interest, taxes, and insurance.”

Understanding PITI is actually important for two key reasons. Here’s what they are.

1. PITI helps you estimate your total monthly payment

The biggest reason you should know what PITI means is because these four big expenses will likely make up the monthly payment you must make after buying a home.

  • Principal: Principal is, over time, likely going to be one of the biggest homeownership costs. It refers to the total loan balance on your mortgage when you borrow. For example, if you borrow $200,000, you must pay off $200,000 in mortgage principal over the life of your loan.
  • Interest: Interest is the cost of borrowing, or the finance charges imposed. It’s expressed as a percentage of principal. For example, if your loan is at a 4% interest rate, you’ll owe interest equaling 4% of your outstanding balance each year. Interest costs will be huge at the start of your loan, but will decline over time as your principal balance goes down and you pay financing charges on a smaller amount.
  • Taxes: Property taxes are paid to your local government, but chances are good your mortgage lender will collect them. If that’s the case, the lender determines your annual property tax cost, divides that amount by 12 months, and adds that amount to your monthly payment every month. The money …….


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