In the mortgage process, PITI is one of the most important components of the financing formula. This acronym stands for principal, interest, taxes and insurance, and each element is important to the success of a loan.

Principal is the amount borrowed. This is the total loan amount, minus any down payment. The principal does not include any fees, nor does it include any interest or other costs associated with the loan. Interest is the cost of borrowing the principal and is expressed as an annual percentage rate, or APR, on the loan. Mortgage interest is added to the principal over the term of the loan and contributes to the total monthly payment.

Taxes and insurance are also part of the mortgage payment. Taxes are based on the value of the property and are paid to local governments. Homeowners insurance is a required part of any mortgage, and can be included in the monthly payment or paid separately in addition to the mortgage payment.

The total amount of the monthly mortgage payment, including all of the PITI components, is called the PITI payment. This figure is important to both lender and borrower. Lenders look at the total PITI ratio to determine if the borrower can reasonably meet the payment based on their income and other obligations. Borrowers should make sure the total PITI is affordable or they risk getting underwater on their loan.

PITI helps lenders and borrowers assess cost and affordability. Understanding the components of the PITI system can help potential home buyers make an educated decision on the purchase of a home. Knowing the total monthly costs and having a plan to pay that cost is key in order to keep your home ownership a success.