Understanding the Components of a Mortgage (PITI)
A residential mortgage payment is commonly referred to in banking as PITI: Principal, Interest, Taxes, and Insurance.
- Principal: The portion of your payment that directly pays down the outstanding loan balance.
- Interest: The lender's financing charge for borrowing the money, based on the annual interest rate.
- Property Taxes: Municipal taxes levied by local city or county governments, held in escrow by the mortgage servicer and paid on your behalf.
- Homeowners Insurance: Hazard insurance policy safeguarding against structural damage and property loss.
The Mathematical Calculation
The Principal & Interest portion is calculated via:
$$M_{PI} = (\text{Home Price} - \text{Down Payment}) \times \frac{r(1 + r)^n}{(1 + r)^n - 1}$$
Where $r = \text{APR} / 1200$ and $n = \text{Term in Years} \times 12$.
The Total Monthly Outlay equals $M_{PI} + (\text{Annual Tax} / 12) + (\text{Annual Insurance} / 12)$.