The PITI Parts of a Mortgage Payment: A California Borrower Guide

It’s a pity when mortgage shoppers don’t understand PITI.

(Sorry, we had to go there.)

But in all seriousness, PITI is a very important concept for California home buyers and mortgage shoppers to understand. It can affect everything from the size of your monthly payments to the total amount of interest paid over time, among other things.

Understand PITI can also help when it comes to budgeting and financial planning. After all, your principal payments are only one piece of your total monthly housing costs. If you’re like most home buyers in California, you’ll also have to pay interest, taxes and insurance when buying a house.

So let’s explore the different parts of PITI to see how they add up.

PITI: The Primary Components of a Mortgage Payment

PITI (pronounced pity) is an acronym that stands for principal, interest, taxes and insurance. It represents the total monthly payment a borrower makes on a mortgage loan.

• The principal is the amount of money a home buyer borrows from the lender.
• The interest is the price you pay when borrowing money, also known as the mortgage rate.
• The taxes are the property taxes the borrower owes to the local government.
• The insurance is the homeowners insurance the borrower uses to protect their investment — and sometimes mortgage insurance, as well.

In addition to PITI, borrowers may also have to pay other monthly expenses associated with owning a home. This might include homeowners association (HOA) fees, utilities, and maintenance costs. California home buyers should consider all of these expenses, when determining how much they can afford to spend on a home.

But getting back to PITI, let’s take a closer look at the four individual parts of a monthly mortgage payment…

P: Principal Amount Being Borrowed

In the acronym PITI, the “P” stands for “Principal.” The principal is the initial amount of money you borrow from the lender to purchase your home. It’s the core amount of the loan that you’re working to pay off over time.

When you make your monthly mortgage payment, a portion of it goes toward reducing the principal balance of your loan. As you continue to make payments, the portion allocated to the principal gradually increases. This helps you build equity in your home (that’s the ownership stake you have in the property).

Essentially, the principal is the foundation of your mortgage, representing the actual amount you owe on your home loan.

I: Interest Rate Assigned to Your Loan

In the mortgage payment acronym PITI, the first “I” stands for “Interest.” Interest is the cost you pay to borrow money from the lender. It’s essentially the fee for using the lender’s funds to purchase your home and is also referred to as the “mortgage rate.”

When you make your monthly mortgage payment, a portion of it goes toward paying the interest that has accrued on your outstanding loan balance.

In the early years of your mortgage, a larger portion of your monthly payment goes toward paying off the interest, while a smaller portion goes toward reducing the principal. This balance gradually shifts over time. So as you make more payments, the interest portion decreases, and the principal repayment portion increases.

Over the life of the loan, you end up paying more interest in the early years — and more principal in the later years. This is the basic concept behind “mortgage amortization.”

T: Taxes Assigned to Your Property

In the mortgage payment acronym PITI, the “T” stands for “Taxes.” Specifically, we are talking about property taxes that you, as a homeowner, are required to pay to your local government or municipality. Property taxes help fund various public services such as schools, roads, and community infrastructure.

The amount of property taxes you pay will depend on the value of your home and the tax rate in your area. In California, property tax rates can vary from county to county.

In a typical mortgage lending scenario, the lender will set up an escrow account to collect a portion of your property taxes each month (along with your mortgage payment). This ensures that there’s enough money to cover your annual property tax bill when it’s due. The lender or loan servicer will then pay your property taxes on your behalf from the escrow account.

I: Insurance Premiums for Your Home and/or Mortgage

The second “I” in the mortgage payment acronym PITI can refer to two different things.

Homeowners Insurance

Homeowners insurance provides financial protection in case of damage or loss to your home and its contents, due to events like fire, theft, vandalism or natural disasters. It can also include liability coverage, which helps cover costs if someone is injured on your property and you’re found legally responsible.

In California, mortgage lenders usually require borrowers to have homeowners insurance to protect the lender’s investment in the property. Your annual homeowners insurance premium is often divided into monthly payments and included as part of your PITI.

Mortgage Insurance

Mortgage insurance is often required when a home loan accounts for more than 80% of the property value. It’s designed to protect the lender in case the borrower defaults on the loan.

Have Mortgage Questions?

Located in the San Francisco Bay Area, Bridgepoint Funding serves home buyers and homeowners all across the state of California. We offer a wide range of home loan options including FHA, VA and conventional.

Please contact our staff if you have questions about applying for a mortgage loan in California. We can review your financial situation and home-buying goals to determine the best financing option!