Guide · Mortgages & Property
US Mortgages Explained: PITI, Amortization, and Closing Costs
Your mortgage is likely the largest financial commitment you will ever make. Understanding its components is essential to ensure you are buying a home you can actually afford.
The Anatomy of a Mortgage Payment: PITI
When you calculate a mortgage payment, the principal and interest only tell half the story. Lenders look at the full picture, commonly referred to as PITI:
- Principal: The portion of your payment that pays down the actual loan balance.
- Interest: The fee the lender charges you for borrowing the money.
- Taxes: Property taxes assessed by your local government. Lenders usually collect this monthly and hold it in an escrow account to pay the annual tax bill on your behalf.
- Insurance: Homeowners insurance to protect the property against damage. Like taxes, this is often escrowed. If your down payment is less than 20%, this also includes Private Mortgage Insurance (PMI).
Always factor in HOA (Homeowners Association) dues as well, even though they aren't part of the PITI acronym, as they are a required monthly expense that affects your debt-to-income ratio.
How Amortization Works
Amortization is the schedule of your loan payments over time. Even though your total Principal + Interest payment remains the same each month (on a fixed-rate loan), the ratio of how much goes toward principal vs. interest changes dramatically over the life of the loan.
Because interest is calculated on your remaining balance, your first few years of payments are heavily skewed toward paying interest.
| Year | Monthly P&I | Interest Paid | Principal Repaid | Remaining Balance |
|---|---|---|---|---|
| 1 | $1,896 | $19,418 | $3,336 | $296,664 |
| 10 | $1,896 | $17,143 | $5,611 | $254,124 |
| 20 | $1,896 | $10,751 | $12,004 | $140,517 |
| 30 | $1,896 | $832 | $21,922 | $0 |
In Year 1, over 85% of your payment is just covering interest. By Year 20, you are making significant dents in the principal.
Closing Costs and the Down Payment
The down payment is the upfront cash you pay toward the home's purchase price. While 20% is the gold standard to avoid PMI, many conventional loans allow as little as 3% down, and FHA loans allow 3.5% down.
However, you also need to bring cash for closing costs. These are fees for the services required to finalize the mortgage and usually run between 2% and 5% of the loan amount. They include loan origination fees, appraisal, title search, recording fees, and initial escrow deposits.
Frequently asked questions
What does PITI stand for?
PITI stands for Principal, Interest, Taxes, and Insurance. It represents the total monthly cost of homeownership that mortgage lenders use to determine your affordability. Principal and interest pay down your loan, while property taxes and homeowners insurance are often held in escrow by the lender and paid on your behalf.
What is PMI (Private Mortgage Insurance)?
If you put down less than 20% on a conventional loan, lenders typically require you to pay for Private Mortgage Insurance (PMI). This protects the lender if you default. It is usually added to your monthly mortgage payment and can be removed once you build enough equity (typically 20%).
What is the difference between a 15-year and a 30-year mortgage?
A 30-year mortgage spreads your payments over a longer period, resulting in lower monthly payments but more interest paid overall. A 15-year mortgage has higher monthly payments but significantly lower total interest costs, and builds equity much faster.
What are typical closing costs?
Closing costs are the fees paid at the end of the real estate transaction. They usually range from 2% to 5% of the loan amount and include origination fees, appraisal fees, title searches, title insurance, surveys, taxes, and deed recording fees.