You are thinking of buying a home and figuring out how much it will cost you every month. Look no further as your monthly expenses can be properly summed up as PITIA.
PITIA stands for five things that you can expect to pay every month after closing. It’s an acronym that every homebuyer like you should know about to help you glide into homeownership.
The Five Components of PITIA
Yes, there’s more to buying a home and that’s taking care of the mortgage bills after.
Your obligations as a future homeowner are represented by:
- Interest Rate
- Property Taxes
- Insurance Premium
- Association Dues/Fees*
* Can also mean “other assessments” based on Fannie Mae’s definition.
It refers to the amount you borrowed or financed to buy the home. A portion of this principal is paid off every month and how much is allocated for it depends on your mortgage type.
The process of paying off your loan’s principal balance is called amortization. It can get stretched out as in the case of 30-year mortgages thus the lower monthly payments, or paid twice faster with 15-year loans but at the expense of higher payments.
Every time you pay toward your principal, your home equity increases. Having this “wealth” inside your home is handy for debt consolidation, university education and other purposes.
A $300,000 loan at 3.90% has a monthly payment of $1,415 to be repaid in 30 years.
When you took out the principal ($300K), you are charged with an interest rate (3.90%) that is computed every month based on annual rate (divided by 12 months).
Notably, the $1,415 monthly payment is the principal + interest portions of the mortgage only.
The interest rate is a major cost of borrowing, along with fees paid or financed at closing. In 30-year loans, the chunk of initial monthly payments goes to the interest costs of the loan.
In the example above, total mortgage with interest paid is $509,401.66. To keep your interest rates low per se, always shop and compare loans. To keep the overall interest costs low, consider shorter-term loans because they are paid off faster.
If the principal and interest of the mortgage payment go to your lender, property taxes are levied by the tax assessor.
Residential property taxes vary by state and region, according to the Tax Policy Center.
New Jersey holds the highest tax rate at 2.35% on a $315,900 median value home per The New York Times. Hawaii has the lowest property tax rate of 0.27% on a $515,300 median home value.
Depending on the lender, your monthly payment might not include taxes as you will have to pay them directly to the tax authority. Other lenders require borrowers to set aside amounts for property taxes and insurance premiums and pay the tax and insurance bills on their behalf.
Homeowners insurance covers your home against losses or damages brought by natural disasters like fire, hail or hurricane.
It is a requirement when you have a mortgage but you can continue maintaining one even when you have paid off the mortgage. It protects your home and its contents to a certain extent from a lot of natural and manmade events that can result in expensive home repairs if borne out of your pocket.
As with property taxes, homeowners insurance premiums can be collected by the lender and paid on your behalf or be paid directly to the insurer.
In certain cases, insurance can also refer to mortgage insurance. This is solely for the lenders’ benefit to make up for the borrower’s putting less than 20% down payment on the home.
If you plan to live in a condo, a planned unit development or a community with shared amenities, you will likely pay fees to the homeowners’ association for the maintenance of these common areas or the building itself.
If you are delinquent in paying these monthly dues, you’ll incur assessments.
The PITIA is a good reference point in determining your readiness for homeownership. Seek the help of mortgage experts today.