PITI – Principle Interest Taxes Insurance
PITI stands for Principal, Interest, Taxes, and Insurance. It is a common acronym used in real estate investing to get a quick overview about the fixed costs that need to be considered when making further calculations or plans for the investment. Here’s a simple breakdown of what each letter represents:
- Principal: The principal is the amount of money borrowed to purchase a property. It is the total loan amount that you need to pay back over time.
- Interest: Interest is the cost you pay to the lender for borrowing the money. It is usually expressed as an annual percentage rate (APR) and is added to your monthly mortgage payment.
- Taxes: Property taxes are charges imposed by local government authorities based on the assessed value of the property. These taxes contribute to funding public services like schools, roads, and infrastructure.
- Insurance: Insurance refers to homeowner’s insurance, which protects the property against damages and liabilities. It typically covers hazards such as fire, theft, and natural disasters.
To illustrate, let’s say you are considering buying a house with a mortgage. If the monthly mortgage payment is $1,500, it might be broken down as follows:
- Principal: $800 (the portion of the payment that goes towards paying off the loan)
- Interest: $400 (the cost of borrowing the money from the lender)
- Taxes: $200 (property taxes assessed by the local government)
- Insurance: $100 (homeowner’s insurance to protect the property)
So, in this example, your monthly PITI payment would be $1,500, with $800 going towards the principal, $400 towards interest, $200 towards taxes, and $100 towards insurance. These components make up your total monthly housing expenses when you have a mortgage.
When looking at a potential investment however, you should also consider additional costs. For example property management, HOA etc. and you should save some money for random repairs.