What is PITI? Understanding and Saving on Your Mortgage Loan

PITI is a very important acronym if you’re a homeowner with a mortgage. It consists of four important factors in your monthly housing costs: Principal, Interest, Taxes and Insurance.

We’ve broken down the jargon and will show you ways to save money at every step.

Principal

Your principal is the amount you originally borrowed for your home. For most types of home mortgages (but not all), this amount decreases each time you make a payment based on a schedule for how the loan is repaid. The financial term for this is “amortization.”

Typically, you can’t lower your principal amount. However, you can usually pay it down faster than the amortization schedule set by the lender using a biweekly mortgage payment plan.

For example, take a 30-year $200,000 mortgage at 4.25%. Biweekly payments can pay off your loan 53 months sooner. You can do it yourself or use a service that automatically debits your account biweekly for half of your regular monthly mortgage payment. At the end of a year, you will have made the equivalent of one extra month’s mortgage payment. It’s that simple and that effective.

Interest

Homeowners pay mortgage interest on the principal balance over the life of the loan. This is one way lenders make money on home mortgages. Other ways include closing fees and points.

Using the same mortgage example as above, you can save more than $25,000 in interest payments over the life of that 30-year loan at 4.25% using a biweekly loan program or doing it yourself. Use this mortgage calculator to see just how much money you can save on your mortgage.

Another option to lower your mortgage interest payments is to refinance your loan to get a better rate. Find out the closing costs and any other fees associated with your refinancing option to make certain the interest rate will decrease enough to justify the costs. Also, be sure to compare the fees of refinancing versus the fees associated with a biweekly payment service, and evaluate other considerations like potentially resetting the clock on your mortgage.

Taxes

Property taxes are calculated by the county government on a yearly basis and used to pay for public services like police, fire and schools. There are a number of steps you can take to cut your property tax bill:

• Appeal your current bill by asking for a lower assessed value, especially if the market value of your home has fallen. However, keep in mind that having your property reviewed carries a certain degree of risk, as the municipality could ultimately determine that your property is undervalued and your taxes should be higher.
• Review the new assessment to make sure your property is accurately described (square footage, number of bedrooms, etc.).
• Make sure you’re getting all the tax breaks your locality allows (e.g., senior citizen, veteran, etc.).
• Compare the description of your property to similar houses in your neighborhood to determine if you’re being overtaxed.

Insurance

Property insurance is required by the mortgage lender to cover the cost of rebuilding your home if it is ruined by fire or other disaster. In addition, private mortgage insurance (PMI) is mandatory for homeowners whose down payment is less than 20% of the home’s loan-to-value ratio.

These mortgage insurance costs can be significant. Here are several options for potential cost savings:

• Ask your insurance provider for a list of all the available special discounts to see if you qualify.
• Consider increasing the deductible on your coverage.
• If your policy has riders, review them to make sure the original situation still applies.
• Once a year, compare the cost of your coverage to offers from other insurance companies.
• If you have mortgage insurance, use the biweekly mortgage plan mentioned above to accelerate the equity in your home and reach the 80% loan-to-value ratio faster to get rid of PMI.

Be informed and know your options when it comes to your mortgage. There are several ways to save, and you owe it to yourself to explore them all. The difference may be thousands of dollars and additional years of mortgage-free living.

Hue Lien Duxbury is the marketing director at AutoPayPlus, a personal financial management service offering automated loan payment and equity building, credit monitoring and protection, and financial planning tools to help consumers reduce debt and take control of their financial future. Email: hduxbury@autopayplus.com.