PITI is an abbreviation for “Principal, Interest, Taxes, and Insurance”.
There are six major expenditures that constitute most of what homeowners spend each month for the ability to continue to own and use their home:
- Principal, which is money paid to the lender to reduce the amount owed to the lender for the purchase of the property.
- Interest, which is money paid to the lender for the right to have borrowed money to purchase the property in the first place.
- Taxes, which is money paid to the government for the right to own the property.
- Insurance, or more specifically Hazard Insurance, which is money paid to an insurer to make sure that the property can be repaired or replaced if it is damaged or destroyed.
- Association Fees, which is money paid to a condo, coop, or homeowner's association that provides services and/or shared infrastructure used by the property.
- Utilities, which is money paid for access to essential utilities such as running water and power (e.g. electricity or natural gas).
One of the factors that lenders use in determining whether a particular borrower is qualified for a particular loan on a specific property is the borrower's debt ratio, which tells the lender how much of the borrower's monthly income will be used up on non-discretionary spending–payments that, if the borrower doesn't make them, will result in adverse legal consequences.
Of the six expenditures above, the first five are considered non-discretionary, and PITI (pronounced “Pee-Eye-Tee-Eye”, “Pittee”, or “Peetee”) is the amount paid for the first four. PITI was traditionally used by lenders both as a way to determine how much a particular loan would affect a borrower's ability to pay the bills, and as a way for lenders to provide a “standardized” number for borrowers to use in comparing the monthly payments required to own different properties (e.g. on Good Faith Estimates).
Since association fees are also non-discretionary, and with the growing prevalence of condominiums, cooperatives, and homeowner's associations, most lenders' Good Faith Estimates and internal calculations now include those fees and refer to “Total Monthly Payment” (or something similar) rather than PITI. Many lenders and real estate agents still casually refer to the resulting number as PITI, however. Also, some lenders and agents use PITI to also refer to what would more accurately be called just the PI (principal and interest) or PIT (principal, interest, and taxes); often, it's a careless or lazy mistake–the agent or lender simply didn't have access to the relevant tax numbers (which require a little bit of effort to find) and insurance numbers (which are actually rather hard to come up with and must thus usually be estimated)–but occasionally it will be done intentionally to make a purchase seem less expensive that it will actually be.
For all of these reasons, consumers should always make sure that they know exactly which of the six elements above are included in any monthly payment figures that they are looking at. When comparing loans packages (with one lender, or between lenders), the PI is usually the best number to consider, since all of the other values should be the same regardless of which lender is being used; when comparing total cost of ownership for multiple properties, consumers should ask for (or calculate) values including all six elements, especially since many association fees now include some or all of the utilities–comparing two PITI+Association Fee numbers, for example, can be an apples-to-oranges comparison if one fee covers all utilities and another covers none of them.
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