Principal, Interest, Taxes, Insurance (PITI)

Principal, Interest, Taxes, Insurance (PITI)

Principal, interest, taxes, and insurance (PITI) are the four components that make up a typical monthly mortgage payment:
PITI = Principal + Interest + Taxes + Insurance

Understanding PITI helps buyers and lenders assess whether a mortgage is affordable and how it affects monthly cash flow.

Key takeaways

• PITI represents the total monthly mortgage payment and is used to evaluate affordability.
• Lenders typically prefer the housing expense (front-end) ratio—PITI divided by gross monthly income—to be about 31% or less, though some allow up to 40%.
• PITI is included in the debt-to-income (DTI) ratio (back-end), where most lenders prefer 36% or less; FHA loans may allow higher DTIs (up to ~43% in some cases).
• Taxes and insurance are often collected in escrow, but not always—lenders may still count those amounts when qualifying borrowers.

Components of PITI

Principal

The principal is the original loan amount. Each payment reduces the principal balance over time, with larger principal reductions occurring later in a typical amortization schedule.

Interest

Interest is the cost of borrowing. Early in a fixed-rate mortgage, most of the payment goes to interest; over time the share applied to principal increases.

Taxes

Property taxes are set by local governments and usually paid annually. Lenders commonly divide the annual tax bill into monthly payments and hold them in escrow until due.

Insurance

Homeowners insurance protects the property and contents. Private mortgage insurance (PMI) protects the lender when the borrower’s down payment is less than 20% of the home’s value. FHA loans require a mortgage insurance premium (MIP), which typically includes an upfront charge plus monthly payments.

How PITI affects mortgage affordability

Housing expense (front-end) ratio

This ratio compares PITI to gross monthly income. Example: a $2,000 PITI on $6,500 gross monthly income yields a front-end ratio of 31% ($2,000 ÷ $6,500).

Most lenders target a front-end ratio around 31% or less; some allow up to 40% depending on borrower qualifications.

Debt-to-income (DTI) ratio (back-end)

DTI compares total monthly debt obligations—including PITI—to gross monthly income. Example: with $2,000 PITI plus $350 other debts (car, credit card) on $6,500 income, total monthly obligations are $2,350 and DTI is 36% ($2,350 ÷ $6,500).

Most lenders prefer a DTI of 36% or less; FHA loans may permit DTIs up to about 43% for some borrowers.

Reserve requirements

Some lenders require cash reserves expressed as multiples of PITI (for example, two months of PITI) to cover payments in case of income disruption.

Special considerations

• Escrow: Not all mortgages escrow taxes and insurance. If not escrowed, homeowners pay taxes and insurance directly, but lenders still typically count estimated amounts when qualifying borrowers.
• PMI and MIP: PMI is required when down payment <20%; FHA borrowers pay MIP, often including an upfront fee plus monthly MIP.
• Additional costs: Lenders may include homeowners association (HOA) fees and other recurring housing-related charges when calculating qualifying ratios.
• Credit and reserves: Higher credit scores and cash reserves can relax some qualifying thresholds.

Frequently asked questions

Q: Is property tax included in PITI?
A: It can be. Many lenders collect property taxes monthly into an escrow account and include them in PITI; if not escrowed, taxes are still considered in underwriting calculations.

Q: What does PITI stand for?
A: Principal, Interest, Taxes, Insurance—the typical components of a mortgage payment.

Q: What’s the typical maximum PITI as a share of income?
A: Lenders commonly target a front-end ratio of about 31% or less, though allowable limits vary and some lenders may permit up to 40%.

Conclusion

PITI—principal, interest, taxes, and insurance—captures the full monthly cost of homeownership that lenders use to assess mortgage affordability. Calculating PITI and comparing it to gross income (through front-end and back-end ratios) helps borrowers understand what they can realistically afford and how lenders will evaluate their mortgage application.