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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School District Makes a Big Difference

It might be understandable for some individuals who are looking for a home not to consider the performance of the school district. This is an important factor to consider when home shopping. Overlooking this factor might be an understandable tendency for a single person not thinking ahead to having children, a young homebuyer, or an older person who does not personally connect with the question of local schools. It might surprise you to know that even in those cases, the quality of the school district deserves serious evaluation as a significant factor to include in your plan.

School Desirability Affects Home Prices
The district where a home is situated is a key driver affecting the prices of homes in certain areas or neighborhoods. With increased sophistication of the vast majority of buyers in recent years, it has become more frequently the case that homes in better school districts sell for significantly higher prices than homes in other districts, even comparing homes that are otherwise nearly identical.

The difference attributable to the performance of the school district is real. Homes that are situated in higher-performing school districts can sell for as much as 30 percent more than comparable homes in other neighborhoods. If you look at an median cost of a residence at approximately between $180,000 and $240,000, the difference is significant.

In a Buyer's Market, Buyers Can Be Picky
In previous years, home buyers were more worried about such things as the home's nearness to shopping centers, downtown businesses, work, and possibly aesthetic attributes such as the appearance of the neighborhood. Now, home buyers are more attuned to negative factors such as being located in school districts that are less desirable. Homes located in these districts can be hard to sell.

Perception Leads to Real Value
In some areas with the best schools, buyers actually bid against each other. This can contribute to inflated real estate prices; or, in a slow market can cause homes to hold value against a prevailing decline. This affects the listed price of all other homes in the area available for sale after the transaction has closed. Savvy buyers get school performance reports early in the search for a home. They know that this is a big factor in the value of the home and an factor in what the home may go for in the future.

School District Uncertainty
No matter the state of the market, any reason that could compel an individual to buy a home in a particular area adds to the value of the homes there. Investors and homebuyers alike must remember that the boundaries of school districts can be changed, which can increase or decrease the value of the property significantly. In an established district that is near a new subdivision, for example, things could shift seemingly on a whim. In the real estate market not much is guaranteed.

This article was provided by Automated Homefinder, your Boulder home specialists in Colorado.