The U.S. housing market has been on fire for several years now. Are you looking to get in on the action in 2020? How exciting! When preparing to buy your first home, you will encounter your share of industry lingo in the process. Among them is PITI — an acronym that stands for "principal, interest, taxes, and insurance." Those four things enter into the equation when it comes to many borrower’s mortgage payments.
Here’s a look at what these terms mean and how they can affect you:
Principal refers to the amount of money you borrowed from your lender, minus the amounts repaid to the lender. As you pay your mortgage every month, this is applied to reduce the principal.
Mortgage interest is the main way the lender makes a profit on your loan. Amortization is a word you might hear in this context. It refers to the process and period of reducing debt. For example, in the case of a 30-year mortgage, the largest portion of a monthly payment is applied toward interest, with only a small fraction of the payment chipping away at the principal. With time, more of the monthly payment is paid to the principal, with a smaller amount applying toward interest. So in this sense, owning a home calls for a long game mindset.
The amount of taxes you’ll have to pay varies according to your locale. Every county has its own taxation system. The rate of taxation can fluctuate from year to year. And sometimes property values are reassessed upon resale — you shouldn’t count on the previous homeowner's tax payments remaining consistent. Check with your county assessor's office for specifics.
An aside: The timing of your first tax payment after you take ownership will depend on how much the lender withholds when setting up the tax account. It’s safe to assume that anywhere from two to six months will be collected in advance, reflected in your closing costs.
If you are buying a single-family home, you will need to take out an individual homeowner's insurance policy. Don’t procrastinate, especially if you're buying an older home — some companies are unwilling to insure, because factors like wiring, plumbing, and the roof can present a higher risk of damage to the home.
It’s important to note that you will need to pay upfront for the first year of insurance coverage at closing. However, you may arrange with your lender to pay for subsequent years of coverage through your mortgage payments.
It helps to be educated so that you know what you’re signing up for when you prepare for such a life event as buying a home. But know that you don’t have to go it alone. Ruoff Mortgage knows that researching and educating yourself is the first step towards making any big decisions. We have guides for every stage of the process with detailed explanations of what you should expect, and worksheets to help you plan for your homeownership dreams.