Sounds like a 70′s song to me! Actually every potential home buyer needs to know exactly what the term “PITI” is.

P

This is the Principle of your mortgage. The lender calculates the payment based on the principle balance of the loan. This amount is small at the beginning of the loan term and grows larger as the balance is paid down and the interest owed becomes less.

I

This is the interest that is paid monthly on the amount of the principle. This amount will make up the bulk of the monthly payment but reduce in tiny increments as the loan’s principle balance is paid down.

T

Taxes. This is the part we all hate. The taxes paid on a home are paid in arrears. This means that you will be paying a monthly amount (1/12th of the yearly tax bill) into an escrow account. At the end of the year, the El Paso County Assessor will bill you (actually the mortgage company gets the bill) and it gets paid out of the escrow account. Taxes will be for things like the library district, schools, fire protection etc. They will vary depending on the area that the home is located in. It is very important to check the yearly taxes PRIOR to making an offer on a home. If the home is brand new, keep in mind that the current taxes will be for the land only. The bill will go up quite a bit once the property has been assessed. Most lenders will escrow enough money to cover this future bill.

I

Insurance is required on all mortgaged properties. This will protect you and the lender is case of a loss on the property. The bill is paid each year in advance. When you buy the home, the first years premium is collected at time of closing. Every month, the insurance portion of the payment goes into an escrow account and is then paid when the yearly bill comes due. The key to having a lower insurance payment is to keep a close watch on the yearly deductible as well as the amount of personal property that you have. I have USAA insurance and they are famous for over estimating the amount of personal property that a person has in order to get a much higher premium. I once had a second home in the mountains with minimal furniture in it. USAA quoted my policy with $250,000 worth of contents inside. The home was not even worth that much. I am a savvy shopper so I caught that trick and made them reduce the amount. This gave me a much lower quote than the previous one. I have also had several clients that have experienced this as well. Be sure to get a written copy of the quote and read it carefully to look for ways to save money.

The mystery of PITI is really not so difficult to solve. The key is to analyze each separate component in order to keep the total monthly payment as low as possible. If you would like to know how to reduce your PITI, please contact me or leave a comment below.