Mortgage Lingo- PITI Pronounced “pee-eye-tee-eye”

Mortgage Lingo- PITI Pronounced “pee-eye-tee-eye”

First time home buyers that come in to my office sometimes think that once you make your payment to the bank of principal and interest their financial obligation is complete. When you own a home, your fiscal responsibility to the lender goes deeper than just your monthly principal + interest payments. You have to bring the 4 pieces of the puzzle together as well.

You’ve got taxes and insurance to manage, too.

Defining PITI

The mortgage contract requires homeowners to make 4 payments each month — principal, interest, taxes, and homeowners insurance — collectively known as PITI.

Pronounced “pee-eye-tee-eye”, PITI’s pieces can vary. For example, interest only loans may not require principal, and owners of a condominium may pay assessments instead of insurance, but the principle is the same — don’t skirt your obligations.

Failure to make a principal + interest repayment can invoke a mortgage contract’s acceleration clause and result in foreclosure.

Failure to pay a home’s real estate taxes and/or hazard insurance premiums can also lead to foreclosure and/or invoke the contract’s loss payee clause, respectively.

Either way, you don’t want to miss a payment.

How To Pay Taxes And Insurance Is Up To You

Lenders let homeowners choose how to manage yearly tax and insurance obligations, usually(exception FHA).  You can opt to pay the bills in full when they come due by yourself, or you can choose to pay 1/12 of the annual bill to the lender each month which, in turn, pays the bills for you upon their respective due dates.

The latter method is known as “escrowing” taxes and insurance. The former is known as “waiving escrows”. Waiving escrows is rarely permitted for homeowners with loan-to-values in excess of 80 percent, and is disallowed on FHA loans.

Not surprisingly, loan servicers prefer that homeowners escrow. This is because escrowing taxes and insurance reduces two major lender risks:

  1. That a home’s real estate taxes go delinquent and are  sold to a third-party
  2. That a home endures major damage during a lapse of insurance coverage

Servicers prefer escrows because, in theory, a home’s taxes are always current and the home’s insurance is always paid.

Calculating What You’ll Need For Escrow Each Month

To figure out how much escrows will add to your mortgage payment each month, you may not even need a calculator. Just take the sum of the annual real estate tax bills and insurance bills for your homes, then divide that number and divide it by 12 months in the year.

As an example, a Pleasanton, CA  home with a $8,400 annual tax bill and a $1,200 insurance policy = $9,600 annually = $800 paid into escrow monthly. These monies are lumped into the “regular” mortgage payment each month, along with the mortgage’s scheduled principal + interest payment.

Most mortgage statements itemize what’s being paid into each PITI category for the homeowner’s records.

When You Escrow, You Get Lower Mortgage Rates

Because escrowed loans are lower risk to lenders, homeowners that choose to escrow tend to get the lowest rate, lowest fee loans.  This is the result of lenders charging a premium to homeowners wishing to “waive escrow”. It’s a risk compensation thing.

Escrow waiver fees vary between banks, and not all banks will charge them, but the cost can range up to half-percent of the amount borrowed. The larger the loan, in dollar terms, the stiffer the penalty.

Alternatively, waiving escrows can also raise your mortgage rate by up to 0.250 percent.

Can You Get A Loan With No Escrow Waiver Fees?

Not all lenders charge an escrow waiver fee so if you prefer to “pay your own way”, make sure to give me a call or contact me below. I can look into pricing for you to see what’s possible. The larger your loan, of course, the more you can save.

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