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- For more information about affordable loan programs and new home loans including Home Equity and Refinance call
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| Preparing for Home Ownership |
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The Mortgage Loan
Principal and InterestA mortgage (home loan) payment consists of two parts, referred to as PI. The amount of money you borrow in order to purchase a home is called the principal (P). The cost of borrowing this money is called interest (I).
Taxes and InsuranceTwo other important factors when considering your ongoing payment obligations for a home loan are taxes (T), and insurance (I). Together, these four components are often referred to as “PITI.”
Understanding Fixed Rate Loans
With a fully amortized fixed rate loan, your monthly principal and interest payment on the loan does not change for the life of the loan. If your real estate taxes or hazard insurance premiums change this will change your total monthly payments. At the end of the loan term, the entire balance has been repaid, and the loan is paid off.
How Your Principal is Reduced
In the early years of the loan, the majority of the payments you make go toward interest with the remainder going to principal, but the balance between interest and principal changes when you make each payment. In the following example you can see how the principal balance is reduced payment after payment. After 360 payments on a 30-year fixed-rate loan, the principal will be zero.
| Reduction of Principal Balance – Amortized Loan |
| $171,000 loan at 7% interest with total monthly payment of $1,138 |
| Month |
$ to Principal |
$ to Interest |
Balance Due |
| #1 |
$140 |
$997 |
$170,860 |
| #2 |
$141 |
$996 |
$170,719 |
| #3 |
$142 |
$995 |
$170,577 |
| #12 (1 yr) |
$149 |
$988 |
$169,263 |
| #36 (3 yr) |
$172 |
$966 |
$165,403 |
| #60 (5 yr) |
$198 |
$940 |
$160,965 |
| #180 (15 yr) |
$397 |
$741 |
$126,572 |
| #360 (30 yr) |
$1,131 |
$ 7 |
$ 0 | | |
Property Taxes
The T of PITI stands for taxes. Every municipality operates on the basis of property taxes that are paid by homeowners either once or twice a year. You may have the option to pay your taxes yourself, or you might be required to establish an “impound account" (also called escrow) with your lender. The lender will add the estimated tax amount to your monthly statement and will pay your taxes for you during the year. Ask your home loan consultant about impound accounts. Some lenders will provide a slightly lower rate for choosing an impound account. If you do not establish an impound account with your lender, you must use great care to ensure that you save enough money to pay your taxes — and then pay them on time! If you establish an impound account, each month the lender collects an estimated 1/12 of the property tax that will be due in order to have the funds available when it is time to make the payment.
Homeowners Insurance
The last “I” in PITI stands for homeowners insurance. In order to protect their security interest in a property (the home you are purchasing is used as collateral to borrow money from the lender), lenders require the property to be insured. Each month, 1/12 of the homeowners insurance premium is collected so that the lender can make that payment in a timely fashion. More about homeowners insurance will be covered in Steps for Buying a Home under Getting the Loan.
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