If you’ve ever played with a mortgage calculator to test monthly payments for different terms and rates, you know these calculators will spit out a payment amount that’s precise to the penny. The only problem? For most people, your monthly payment will be higher. And likely a lot higher.
The reason is that mortgage calculators compute only one thing: the amount you’ll owe the lender for your loan. Spread your loan amount over the term of your mortgage, then add interest, and this gives you your monthly payment to the lender.
This portion of the payment is called principal (P) and interest (I). But owning a home includes two additional expenses that aren’t optional, and they come with the letters T and I.
T stands for taxes, or the property tax that will be assessed on your home. While these taxes are due just once a year, most homeowners pay 1/12th of the annual amount into escrow once a month, tacked onto their monthly principal and interest payment.
Then comes I, for insurance. Everyone with a mortgage is required to carry homeowner’s insurance. Like property taxes, the insurance premium is usually due once a year, but is often escrowed in 1/12th payments that are also added to your mortgage payment.
For homeowners putting less than 20 percent down on their home, private mortgage insurance (PMI) will also be required, until your equity in the home builds to at least 80 percent. For these homeowners, PMI is a fifth component in your monthly payment.
Put these all together and a homeowner’s “all in” payment every month is characterized as PITI. So go ahead and start with that initial mortgage calculator number, but then determine what you’ll need to tack on for taxes and insurance to calculate your actual monthly obligation.