Mortgage rates typically are tied more to the yields on the 10-year Treasury note more than any other indicator. With the government in flux as the shutdown happened and ended, mortgage rates are also changing. Overall, mortgage rates have decreased because of a lack of confidence in the government's ability to get its finances under control.
How does my mortgage loan get broken down into monthly payments? What all is included in the monthly payment?
These PITI and monthly mortgage payments questions are common among home buyers in Washington, where we are based. Today, we’ll take a look at the four “PITI” factors that make up the typical down payment in a home buying scenario.
Breaking Down the PITI of Mortgage Payments
The monthly payments for a mortgage loan can be determined by several factors. The “base loan amount” you are borrowing is the biggest part of it, but there are other ingredients as well. It’s important to understand these factors when buying a home in Washington because they add up to the actual amount you’ll be paying each month.
The acronym PITI (pronounced like “pity”) is often used to describe the four factors that make up a typical monthly mortgage payment. Here’s what those letters stand for:
- P: Principal loan amount being borrowed
- I: Interest rate assigned to the loan
- T: Taxes on the home assigned by the county or city (i.e., property taxes)
- I: Insurance (this can mean homeowners insurance, and sometimes also mortgage insurance)
Let’s look at each of these monthly payment factors in turn:
When you hear a bank or lender talk about the “principal,” they’re referring to the actual amount being borrowed. The principal is spread over the term or life of the loan, and it accounts for most of the monthly payment.
When you make your mortgage payment each month, a portion of the payment goes to reducing the principal. The amount that gets applied to the principal can change over time, depending on the structure of the loan.
You’re probably familiar with interest already. As consumers, we pay interest on everything from credit cards to car loans. Mortgages have interest as well, and it’s another one of the factors that will determine your monthly payment. Just like the principal amount mentioned above, the interest gets spread out over the repayment term.
On a typical home loan, a higher percentage of the monthly payment goes toward interest during the early years of the repayment term. But over time, this will change and more of the monthly payment will be applied to the principal. Because of this, the principal reduction is usually greatest in the later years of the repayment period.
Home buyers in Washington State typically have to pay property taxes as well. The amount you pay will depend on the assessed value of the home (as determined by the assessor’s office) and the property tax rate in the county where you reside.
In a typical mortgage scenario in Washington, the tax portion of the monthly mortgage payment gets held in a special escrow account set up for that very purpose. It then gets sent to the appropriate government agency when the taxes are due.
We’ve covered the first three letters of PITI — principal, interest and taxes. The second ‘I’ stands for insurance, and it can mean two different things. It can refer to homeowners insurance as well as mortgage insurance.
Most home buyers in Washington State have to pay for homeowners insurance, because it’s a requirement for most mortgage loans. (It’s also a wise investment.) Some home buyers also have to pay for mortgage insurance, due to having a relatively high loan-to-value ratio. The annual premiums for these policies are typically spread out over the monthly payments.
Have questions? Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region. Please contact us if you have mortgage-related questions.