There's more to the typical mortgage payment than just the payment on the mortgage. Homeowners commonly pay for property taxes and homeowners insurance as part of their monthly mortgage payments.
Their lender collects that money each month, stashes it in a special account called an escrow account, and then pays the tax bills and insurance premiums out of escrow. A mortgage payment set up this way is referred to as a PITI payment, which stands for principal, interest, taxes and insurance. Calculating the "PI" portion is a bit more complicated than the "TI" part.
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Calculating Principal and Interest
You'll need three pieces of information about your loan to calculate the principal and interest portion of your mortgage payment:
- The principal, or the amount you're borrowing.
- The interest rate on the loan.
- The number of months in the loan term. A 30-year loan is 360 months; a 15-year loan is 180.
In the formula that follows, PMT is your monthly payment. P is the principal amount, n is the number of months, and r is the monthly interest rate. To get the monthly rate, take the annual rate, convert it to a decimal and then divide by 12. Say the annual interest rate is 6 percent. Converting it to a decimal gives you 0.06. Dividing by 12 is 0.06/12 = 0.005.
The formula: PMT = P [ r (1+r)^{n}] / [(1 + r)^{n} - 1]
Example
Say you take out a $200,000 loan for 30 years at 6 percent annual interest:
- P = $200,000
- r = 0.005
- n = 360
Putting the numbers in:
PMT = 200,000 x [0.005 x 1.005^{360}] / [1.005^{360} - 1]
PMT = 200,000 x [0.005 x 6.0226] / [6.0226 - 1]
PMT = 200,000 x [0.0301 / 5.0226]
PMT = $1,199.10
Tip
Now that you know how the formula comes together, you can save time by having an online mortgage calculator do the math for you. Just enter the loan amount, the term (usually in years) and the interest rate (usually the annual rate).
Calculating Taxes and Insurance
Property tax information is typically public, and records are usually maintained by a county assessor or similar office. If you're interested in a certain property, look it up on the assessor's website, or ask your real estate agent to get the information for you. Once you know the annual tax on the property, simply divide that amount by 12 to get the portion you'll pay each month.
Warning
Property tax is based on a home's assessed value, which should be listed in the property tax records. The assessed value is the tax authority's estimate of what the home is worth. If you buy a home for more than the assessed value, don't be surprised to see the assessment — and your taxes — rise as a result.
Talk to your insurance agent about how much it would cost to insure the home for a year. If you don't have an agent, call around for quotes. Once you get a number, divide it by 12 to get your monthly payment for insurance.
Example
Say the taxes on your property are $3,000 a year, and it will cost $900 a year to insure it. Together, that's $3,900. Dividing by 12 gives you a monthly tax and insurance payment of $325.
Finishing the calculation
Add together your monthly principal and interest payment and your monthly tax and insurance payment, and you get the final PITI payment. In the example, it would be $1,524.10
In some cases, your lender may require you to pay for private mortgage insurance, or PMI. This insurance protects the lender in case you default on the mortgage. It's often required for borrowers with a very small down payment or with less-than-great credit. Your monthly PMI premium is simply added on top of your PITI payment.
If the home you buy is in an area covered by a homeowners' association, or HOA, you may be able to have your HOA dues handled through escrow, just like taxes and insurance. In that case, take the annual HOA dues, divide by 12 and add that to your payment on top of PITI and PMI (if applicable).
What Can Change Your PITI Payment
The type of mortgage you have has an ongoing effect on PITI. If your mortgage has a fixed interest rate, then the principal-and-interest portion of your monthly payment will never change. However, if you have an adjustable-rate mortgage, then your rate can go up and down. When your interest rate changes, the lender will recalculate your monthly payment. If your rate goes up, your payment will rise, too. If your rate drops, so will your payment.
Property taxes and homeowners insurance premiums commonly change from year to year, even if only by a small amount. As a result, your total PITI payment will likely change over time, even if you have a fixed-rate loan.