Most buyers look at the principal and interest and forget the rest. Lenders do not: they look at PITI, the full payment with property tax and insurance. Investors should too, because tax and insurance are often a third of the payment on a rental.
01The four parts of PITI
- Principal: the part that pays the loan down.
- Interest: what the lender charges for the money.
- Taxes: one-twelfth of the yearly property tax, usually collected by the lender in escrow.
- Insurance: one-twelfth of the yearly home insurance premium.
Add HOA dues if there is a homeowners' association, and PMI if you put less than 20% down on a conventional loan.
02The formula
Principal and interest come from the standard loan formula: loan × r ÷ (1 − (1 + r)^−n), with r = yearly rate ÷ 12 and n = years × 12. The calculator does this for you and shows every step.
03A worked example
A $300,000 house with 20% down is a $240,000 loan. At 6.75% for 30 years, principal and interest are about $1,557 a month. Property tax of $4,200 a year adds $350, insurance of $1,800 a year adds $150. PITI is about $2,057 a month, and the total interest over 30 years is more than $320,000.
04How investors use PITI
- Rentals: rent must cover PITI plus vacancy, repairs and management. PITI alone is not cash flow.
- DSCR loans: lenders divide the rent by PITIA (PITI plus HOA). Most want 1.20 or more.
- Offers: a seller's existing payment (for a subject-to deal) is also judged as PITI.
05Where the tax number comes from
The property tax in PITI should be the real bill, not a guess. The county treasurer publishes it for every parcel; in LeadCounty every property file shows the actual tax billed and any tax owed. Run your own numbers in the free mortgage calculator.
