Principle, Interest, Taxes and Insurance – or PITI in real estate lingo – is your monthly payment when you buy a house with financing. It is not your only month expense – but it is likely the biggest.
Principle and Interest is the amount that is actually paid to the loan company for funding the transaction. Your loan docs will include a payment schedule that shows how much month each year is credits to paying down the loan balance and how much is interest charges. During the first several years, very little of the payment is actually applied to the loan balance.
Taxes and Insurance are two on going expenses. Taxes are paid to a city, county, township or other collecting agency. In Nevada, property taxes are annual taxes but installment payments of 4 times a year are allowed to spread out the hit on owner’s bank accounts. For Nevada, it is the county where the property is located. Hazard Insurance (as opposed to Liability or Possession coverages) is designed to protect the loan company in the event there is damage (fire, tree falling over, etc) to the property. It is designed to allow the owner to repair the property to maintain it’s value in the marketplace.
The loan provider realizes that people may not have the money when these items become payable. The solution to this is the loan company estimates the annual total, divides it by 12, and adds that amount to the monthly bill. Then when the bills for taxes and insurance come due, they pay it on behalf of the homeowner.
Within PITI, if you have a fixed rate loan, P&I will not change over the life of the loan. However, you annual payments can (ok, will) increase as Taxes and Insurance are always going up.
Depending on your loan type, you might also have a payment for FHA mortgage insurance. If you used a conventional loan but did not have enough down payment, you might also have PMI or Private Mortgage Insurance. This insurance payment will help protect the loan company’s investment should you default on the payments.
When shopping for loans – ask your loan officer for details on different options and always ask for the TOTAL payment not just the loan payment.