Understanding what is included in your monthly mortgage payment is as easy as remembering five letters: P, I, T, I, A. The mortgage industry uses the acronym, PITIA—Principal, Interest, Taxes, Insurance and homeowner’s Association fees—to break down the components of a homeowner’s monthly payment.
Every mortgage contains at least two parts: principal and interest. Principal is the amount of money you have borrowed for your home purchase and interest is the cost of borrowing that money. If you have a fixed-rate mortgage, your principal and interest will remain the same for the life of the loan.
The second two portions of a mortgage payment, taxes and insurance, are typically set aside in escrow. When used in a mortgage context, escrow is a means of setting aside funds monthly so that the lender can collect the necessary funds to pay the costs of property taxes, homeowners insurance and, if required, private mortgage insurance (or PMI, usually stipulated for mortgage loans which are greater than 80% of the property value). When payment is due for taxes and insurance (typically on an annual basis), the lender pays them on behalf of the borrower from the escrowed funds, streamlining the process.
When taxes and insurance are due, the lender pays them for the borrower from the escrow account, streamlining the process. Bear in mind that taxes and the cost of insurance can increase or, more rarely, decrease over time, even with a fixed-rate mortgage. This means that there is likely to be a difference from year to year in the amount which must be escrowed, resulting in probable adjustments in your monthly payment—no matter the type of mortgage you have.
Finally in PITIA is the “A,” the Homeowner’s Association Fee (or HOA). Condominium, townhomes and even certain single-family housing developments generally have monthly association fees or dues. Unlike PITI, the HOA is paid directly to the association by the homeowner (as opposed to escrow). Yet, this fee must be considered as an ongoing part of the cost of housing.
Here is an example. The monthly mortgage payment for a homebuyer purchasing a $180,000 home with a five percent down payment, an interest rate of four percent, an annual homeowners insurance premium of $720, $114 per month for PMI, $2,300 for property taxes (for one year) and $125 monthly for HOA fees, would be itemized as follows:
- Principal and Interest: $816
- Property Taxes: $192
- Homeowners Insurance: $60
- PMI: $114
- HOA: $125
- Total Monthly Payment: $1,307
Remember that the monthly cost of housing will vary depending on the type of home and the financing option. For example, a condo or townhome probably will include an HOA. Another factor is PMI. If a borrower puts 20 percent or more down on the purchase, then PMI is excluded.
If you are looking for more homebuying information, our handbook, Mortgage 101, is a great resource for first-time and repeat homebuyers.