What does PITI stand for in real estate financing?

PITI stands for Principal, Interest, Taxes, and Insurance, which are the key components that make up a monthly mortgage payment in real estate financing.

When a borrower takes out a mortgage, the monthly payments typically cover four main components:

1. Principal - This is the portion of the payment that reduces the original loan amount.

2. Interest - This is the cost of borrowing the money, which is calculated based on the loan amount and the interest rate.

3. Taxes - Property taxes are often included in monthly payments and are held in escrow to ensure they are paid on time.

4. Insurance - This generally includes homeowner's insurance and may also encompass mortgage insurance if the downpayment is less than 20% of the purchase price.

Understanding PITI is essential for both lenders and borrowers, as it provides a complete view of the financial commitment involved in homeownership, beyond just the principal and interest of the mortgage. This knowledge helps buyers budget correctly and lenders to assess a borrower's ability to pay over time.