What is PITI?
PITI stands for Principal, Interest, Taxes and Insurance, the four components of a full monthly mortgage payment. Most lenders require all four to be included when assessing affordability.
| Component | What it pays | Fixed or Variable |
|---|---|---|
| Principal | Reduces your loan balance | Fixed (grows over time) |
| Interest | Cost of borrowing the money | Fixed rate or ARM |
| Taxes | Property tax, held in escrow | Variable (reassessed annually) |
| Insurance | Homeowners insurance premium | Variable (annual renewal) |
| PMI | Private Mortgage Insurance (if down <20%) | Drops when equity reaches 20% |
Principal and interest are set the day you sign a fixed-rate loan. Taxes and insurance are not. Your county can reassess the home and your insurer can raise the premium, so the escrow part of the payment usually creeps up a little each year.
Mortgage Formula
The principal and interest part of the payment comes from the standard amortization formula:
P&I = L × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]
L = loan amount · r = monthly rate (annual rate ÷ 12) · n = total payments (years × 12)
A worked example
Borrow $320,000 at 7% for 30 years. The monthly rate is 0.07 ÷ 12 = 0.005833 and there are 360 payments. (1.005833)³⁶⁰ is about 8.116, so the payment is 320,000 × 0.005833 × 8.116 ÷ 7.116, which comes to $2,128.97 a month before taxes and insurance.
In the first month, interest is 320,000 × 0.005833 = $1,866.67. Only $262.30 goes to principal. By year 20 that split has flipped. This is why the first years of a mortgage feel slow and why extra payments early on save so much.
How much house can you afford?
Lenders in the US mostly look at two ratios. The front-end ratio is your total housing payment divided by gross monthly income, and most want it at or under 28%. The back-end ratio adds every other debt payment (car, student loans, card minimums) and is usually capped around 36%, though many programs go to 43% or higher.
On a $2,700 monthly payment, the 28% rule points to a gross household income of about $116,000 a year. That is a lender's ceiling, not a comfortable budget. Leave room for maintenance, which commonly runs 1% to 2% of the home's value each year.
15-year or 30-year?
A 15-year loan has a higher monthly payment but usually a lower rate, and you pay interest for half as long. On a $320,000 loan the 15-year option can save well over $200,000 in interest. The 30-year loan buys flexibility: a lower required payment, with the option to pay extra whenever you can. The comparison cards above show both for your own numbers.
What extra payments actually do
Every extra dollar goes straight to principal, so the next month's interest is charged on a smaller balance. That saving compounds for the rest of the loan. Even $100 a month on a 30-year loan typically cuts several years off the term. Check that your lender applies extra money to principal and that the loan has no prepayment penalty.
When does PMI go away?
On a conventional loan with less than 20% down you pay private mortgage insurance. Under the federal Homeowners Protection Act you can ask for PMI to be removed once the balance reaches 80% of the home's original value, and the lender must cancel it automatically at 78%. This calculator drops PMI at 78%. FHA loans work differently: their mortgage insurance premium often lasts for the life of the loan.