Real Estate Finance Terms: What Exactly Does PITI Mean?

Regardless of whether you are dealing with the purchase or sale of real property, there are many terms that come up. You might say the language of finance and lending is an art in itself. There are hundreds of these special terms and it's not reasonable for a seller or buyer to learn all of them. However, there are some words or abbreviations that it's especially good to become familiar with for your own benefit, and PITI is one. Following is an explanation of the term and of each letter.

Principal
The principal is the actual amount of money that you are borrowing from the lender in order to buy the home. This figure differs all the time at the same home price depending on how large a down payment you make on the home and how much money you actually borrow from the lender. The principal is generally the biggest portion of the PITI equation.

Interest
Whenever you borrow money or pay on credit, you pay interest. This is the amount the lender earns from you as the price of loaning you the money you need, based on the cost of keeping the money from being invested anywhere else. It's calculated in percentages. Depending on the terms you agree on, the interest rate can stay fixed throughout the life of the loan or it can be variable, meaning it is subject to adjustment based on stated rates or factors.

Taxes
Even when buying real estate, you can't avoid paying taxes to Uncle Sam. Taxes on property, though, go to governments at the local level like the city or county to help schools and infrastructure operate. The tax revenues from homeowners help emergency facilities, rec centers, schools and other such facilities serve local residents. The tax assessments are typically added in with your monthly mortgage payment and are prorated each month. The lender pays the tax to the appropriate local government.

Insurance
It would be foolish to have a home without having being insured, and if you buy the home with borrowed money the lender will insist that you are properly insured. A home is your largest investment and a homeowners insurance policy is vital for your family's protection against disaster. There are many kinds of homeowner insurance policies from which you can select, which is more than we can cover in this article. Your insurance options also depend on how much of a down payment you make on the property. If you make a down payment of less than 20% percent, lenders will require you to carry a certain policy that assures they will get their money if you the home is lost to foreclosure. Any required insurance payments are normally rolled into your monthly payment.

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