PITI stands for principle, interest, taxes, and insurance, and by calculating PITI payments potential buyers can more accurately estimate how much home they can realistically afford. PITI essential is the sum of a loan payment that includes the principal amount, loan interest, property taxes, and homeowners/private mortgage insurance premiums. While there are online calculators, here is how to properly calculate PITI payments on your own.
Calculating Principal and Interest
Three key pieces of information are necessary to calculate the interest and principal part of mortgage payments:
- Principal balance which is the amount being borrowed
- Interest rate on the loan
- Number of months in the loan term
Here is the formula: PMT = P [ r (1+r)n] / [(1 + r)n – 1]
PMT will be the monthly payment, with P being the principal amount, n represents the number of months and r is the monthly interest rate. To obtain monthly rates, convert the annual rate to a decimal and divide by 12. For example, a 6% rate would become .05/12 = .004.
Calculating Taxes and Insurance
Contact a few local home insurers to discover the average annual quote to cover the property, and look up the home’s property tax information using public county records. Divide each of these calculations by 12 and add those amounts to the principal and interest to get the final PITI monthly payment amount.
In cases where HOA dues or private mortgage insurance is required, simply add those monthly payments to the PITA calculations to get a bottom line number.
Why Using PITI Before Buying is Wise
When it comes down to the bottom line, calculating PITI payments to determine how much home you can afford is a smart move. This is because this method gives potential buyers a true representation of what the costs will be beyond the basic mortgage calculation, as many overlook additional expenses such as insurance and property taxes when determining their home budget.
If you need advice on a home loan or want more information about PITI payments, contact Mortgage Investors Group today.