What is PITI? Your Mortgage Payment Breakdown

Taking out a mortgage loan is a massive financial investment. And while you may have already run the numbers to figure out how much house you can afford, it’s easy to overlook what actually makes up that monthly payment. 

Your monthly mortgage payment is made up of PITI — that’s Principal, Interest, Taxes, and Insurance. Knowing how each piece works in relation with each other and your mortgage will help you budget with confidence and understand exactly what you’re really paying for. 

What Does PITI Mean in a Mortgage?

PITI is shorthand for the four key components of your mortgage payment: 

• Principal – the portion of your payment that reduces your loan balance. 

• Interest – the cost of borrowing money from your lender. 

• Taxes – property taxes collected by your local government. 

• Insurance – coverage that protects both you and your lender. 

Each of these plays a different role in your monthly budget and in your long-term financial plan as a homeowner. 

Principal = Building Equity Over Time 

Your principal is the original loan amount (home price minus your down payment). Every month, a portion of your payment goes toward paying down this balance. 

At first, most of your payment is applied to interest, but over time, more goes toward reducing principal. This gradual shift builds equity, which we can define as your ownership stake in the home. 

Expert Tip

If you buy a home for $150,000 and put 5% down ($7,500), your starting principal is $142,500. With each monthly payment, you chip away at that number and grow your equity.

Interest = The Cost of Borrowing 

Interest is what your lender charges you to borrow money. It’s based on your loan balance and your interest rate. 

With a fixed-rate mortgage, your interest rate stays the same over the life of the loan. But with an adjustable-rate mortgage (ARM), your rate can change, which means your payment can go up or down. 

Because interest makes up a large portion of your early payments, even a small change in rate can make a big difference in your monthly costs. 

Taxes = Funding Your Community 

Property taxes are assessed by your local government and support schools, emergency services, and general infrastructure. Instead of paying a large lump sum once or twice a year, most lenders spread your property tax bill into 12 monthly installments. 

Your lender typically collects these payments and holds them in an escrow account until taxes are due. This way, you’re covered when the bill arrives, and your lender is protected, too. 

Expert Tip

Keep in mind: tax rates vary widely by location, so when house hunting, factor in the impact local taxes will have on your monthly budget.

Insurance = Protecting Your Home and Your Loan 

Insurance is the final piece of PITI pie, and there are a few types...or slices...you may encounter: 

Homeowners Insurance  

Homeowners insurance protects your home against risks like fire, theft, and certain kinds of damage. All lenders require it because it safeguards both your property and their investment. Coverage usually needs to be equal to at least the value of your home.  

Private Mortgage Insurance (PMI) 

If you put down less than 20%, you’ll likely need PMI. This protects the lender if you can’t repay your loan. The good news? Once you’ve built up at least 20% equity, you may be able to remove it. Even better news? There’s only one more insurance type we need to cover.  

Flood Insurance 

Standard homeowners policies don’t cover flood damage. If your home is in a flood-prone area or near the water, your lender may require additional flood coverage. 

What Many Borrowers Don’t Realize About PITI 

While principal, interest, taxes, and insurance are, let’s call them “the standard four,” your true monthly housing costs can also include: 

• HOA dues (if your neighborhood has a homeowners association) 

• Escrow adjustments (your payment may change if taxes or insurance premiums increase) 

• Mortgage insurance on government loans (such as FHA or USDA) 

Being aware of these extras will help you avoid surprises and budget more realistically.

Why Understanding PITI Matters 

When you understand what goes into your mortgage payment, you’re not just getting ready for closing day — you’re setting yourself up to feel secure and confident for the many, many years to come. 

At Atlantic Bay, we want your mortgage to make sense from the start. Knowing how PITI works isn’t about just “memorizing terms.”  It’s about feeling confident in what you’ll pay each month and why. 

We’ll walk through the numbers with you, talk through ways to keep your costs in check, and make sure your payment lines up with your goals. When you’re ready, reach out to an Atlantic Bay Mortgage Banker and let’s find the financial plan that feels right for you and your family!