In real estate, PITIA -- sometimes just referred to as PITI -- is an acronym that describes all of the components that go into a monthly mortgage payment. Above all, the acronym stands for: Principal, Interest, Tax, Insurance, and Association dues. However, in an effort to make things clearer, we've taken the liberty of explaining each portion of your monthly payment below. Keep reading to learn more about each of these components and how the amount you pay in PITIA will have an impact on your investment strategy.
What is PITIA in real estate?
The first component of your monthly mortgage payment is your principal payment amount. In the mortgage world, your principal balance refers to the amount of money you borrowed for your home loan. For example, if you bought a $200,000 investment property and paid $40,000 up front as a down payment, the principal balance on your mortgage would be $160,000.
Notably, when you first take out the loan, the majority of your payment will go towards paying down interest, but as you pay down the loan, a larger portion of your monthly payment will begin to go to the principal. It's a good idea to look at the amortization schedule given to you by your mortgage lender in order to determine how much of your mortgage payment is going toward your principal balance each month.
The next component of your monthly payment is the interest that you're being charged for the privilege of borrowing the money to buy your home. Put simply, the higher the interest rate you are charged, the more your monthly payment will ultimately be. That's why buyers are typically able to afford more property when interest rates are low, despite the fact that their income may stay the same.
Importantly, if you have a fixed-rate mortgage, the amount of interest you'll be charged will stay the same over the life of the loan. However, if you have an adjustable-rate mortgage loan, your rate may change over the course of your loan term. Usually, these loans come with a lower introductory interest rate. Then, after the introductory rate period is over, the interest rate will adjust at regular intervals, according to market rates.
T: Property tax
Real estate taxes are assessed by government bodies and used to fund certain services in your local area, such as public schools, water treatment, and infrastructure work.
Typically, until you pay a certain amount down on your mortgage, a lender will set up an escrow account and collect these taxes for you. The amount you owe is typically divided by 12 and added on to your mortgage payment with your principal and interest. After you've paid down your mortgage a fair amount, your lender may give you the option to pay your property tax on your own instead of adding it into your payment.
Next up are your insurances. Your lender will also likely collect money for your homeowners insurance and, if you’ve put less than 20% down on the property, your mortgage insurance. Mortgage insurance is typically charged as an annual fee, regardless of whether it's private mortgage insurance or a mortgage insurance premium from a government-backed loan.
In this case, insurance is collected similarly to real estate taxes. Your lender will find out how much you owe for the year and then will collect 1/12th of that amount from you each month. The money will be kept in an escrow account and paid on your behalf when the bill comes due.
A: Association dues
The last piece of this puzzle is association dues. Association dues are fees that condo associations and planned-unit developments charge each month in exchange for providing certain amenities or services. Since not every type of home is part of an association, not every homeowner will have to worry about covering this expense. However, if you know that the property you're considering buying is part of one of these communities, there's a chance that your association fees may be included in your monthly payment.