What’s the Difference Between My Payment and My PITI?
March 23, 2022
Taking out a mortgage loan is a huge financial investment, and sometimes the ins and outs of the process are hard to understand. You may have done calculations to determine how much mortgage you’re able to afford, but did you know your monthly payment includes more than just the price of your home? Your PITI is the total amount of what you’ll owe every month. Let’s break it down.
What is PITI? Principal, interest, taxes, and insurance (PITI) are the parts of your monthly mortgage loan payment. It’s important to understand each element so you know what you’re paying for.
Your lender charges you interest for borrowing money from them. Your interest is a percentage of the principal you still owe back. In the early life of your loan, a large part of your monthly mortgage payment goes toward paying off your interest. Your interest rates may stay the same throughout the life of your loan, like with a fixed-rate mortgage, but it can also fluctuate, like with an adjustable-rate mortgage.
For most mortgage loans, taxes will be rolled into your monthly mortgage payment. Property taxes, also known as real estate taxes, are charged for real estate property, like the house or building on the property, or even the land itself. These taxes are determined by local government officials in your area and fund local public services including schools, construction, and emergency services.
When you make your monthly payment, your lender holds the tax payments in an escrow account until they’re due, at which point they pay them from that account. Some lenders require a little extra money every month in case you come up short when taxes are due. Don’t worry, you’ll get any extra money refunded after your taxes are paid. It may seem odd that you wouldn’t just pay your taxes on your own. Why involve your lender? By including property tax in your mortgage payment, the lender protects themselves. If you’re forced to foreclose on your home, your lender is likely to get stuck with paying the remaining property taxes. By already having money in your escrow account for taxes purposes, the lender isn’t stuck with the entire sum of your taxes.
Why did my loan get sold?
Getting a letter or email from your mortgage company telling you that your loan has been sold can be shocking and concerning. You’ve just purchased a new house, why is your loan being sold and why so soon? What does it mean for you?
The most important thing to remember is that loans are bought and sold all the time. It’s very common in the mortgage industry and is part of how banks and mortgage lenders stay afloat.
Managing thousands of loans comes with risk. Risk comes from homeowners being unable to pay their monthly payments for any reason, bankruptcies, or foreclosures. All these conditions translate to the mortgage lender losing money. Mortgage lenders can reduce some of this risk by selling many of those loans to other lenders. During this sale, the original lender sells the loan to another lender for a percentage of the loan as commission. This equals out the risk for both lenders.
When you buy a home, you don’t typically pay for the whole thing in cash. A mortgage loan is involved – but someone must pay for the house in full. When your loan was approved, your lender paid for your home out of pocket with the understanding that you will pay them back for it. Each loan approved is one more home the lender purchases. Eventually, money would run out entirely since mortgages are often paid off in 30 years. By selling loans, lenders can keep some of their money liquidated in order to pay salaries and buy more homes for their clients.