Ever wonder about the principal payment, interest payment, taxes, and insurance that are on your mortgage? Well, let us explain.
During a time of relatively flat incomes, high debt and stagnant housing values, homeowners still have options to improve their financial position. The average U.S. debtor has a mortgage of $154,365. And if this were a 30-year mortgage at 4 percent, that person would end up paying more than $250,000 by the time the home is owned outright. Sounds like a deep hole to climb out of, doesn’t it? But hidden in that big number is some simple mortgage math that can be leveraged to your advantage, if you know how it works.
What is PITI?
PITI is an abbreviation referring to a distribution of your monthly payments among: Principal, Interest, Taxes, and Insurance. Let’s see how these work together:
- Principal: That’s the amount you borrow ($200,000 if you put 20 percent down on a $250,000 house). So your starting equity in the house is your $50,000 down payment, and the bank owns the other $200,000.
- Interest: This is the amount you pay the bank for lending you money to buy your home. An APR can include mortgage points and fees charged to originate the mortgage in the first year.
- Taxes: This refers to the real estate taxes on the home.
- Insurance: Can include homeowners insurance and mortgage insurance.
Here’s an example of a PITI calculation:
- $200,000 mortgage at 4.7 percent for 30 years
- Annual real estate taxes of $2,400
- Homeowners insurance at $996/year
- Monthly PITI payment of $1,320.27
- Principal & Interest payment of about $1,037
With each monthly mortgage payment, you increase your equity position in the home. Amortization refers to the rate at which equity grows as you pay off the loan. The amortization of most mortgages stipulates that a high percentage of your initial payments goes toward loan interest. This contributes to the high total interest paid over the life of the mortgage.
Common Types of Home Mortgages
There are several more common types of loan arrangements you’re likely to encounter when shopping for a home mortgage:
- Fixed-rate mortgages have one interest rate for the entire duration of the loan.
- Adjustable-rate mortgages (ARMs) have an interest rate that will adjust periodically based on a specified underlying financial index.
- Hybrid-rate mortgages combine characteristics of both types above, starting as a fixed-rate mortgage and later converting to an ARM.
Whatever type of mortgage you choose, mortgage interest can be deducted on your federal tax return if you itemize your deductions. This can be an important source of savings for many homeowners.
The way in which a mortgage affects your particular financial picture over time is determined by many additional variables, including your tax bracket and the appreciation (or depreciation) of your home from the time it is purchased to when it is paid off or sold.
However, you can fight back against the negative impact of traditional mortgage amortization. Accelerating your loan payments with a biweekly payment plan helps you build equity faster and can significantly decrease the amount of interest paid over the life of the loan. In our example above, suppose you split your monthly principal and interest payment of $1,037 in half and paid about $518.64 every two weeks. You’d pay off your mortgage early — in about 25.5 years instead of 30 — and save over $29,000 in interest with AutoPayPlus.
Head over to the AutoPayPlus Mortgage Calculator and plug in your mortgage numbers to see how much you can save.