Understanding Mortgages

Principal, Interest, Tax & Insurance (PITI)

The vast majority of people who purchase a home need to secure a mortgage to finance the property. However, understanding the monthly expense can be complicated for first-time homebuyers and those with little financial expertise. PITI stands for principal, interest, tax and insurance payments, and the following is a breakdown of those expenses:

Principal, Interest

  • The bulk of your monthly mortgage payment is used to repay the loan you’ve secured to finance your home.
  • This is divided between two parts: principal, or the original amount of the loan, and interest, or the additional cost accrued over time.
  • In the beginning, payments consist primarily of interest but as progress is made on the total mortgage value, a higher percentage goes toward principal. This process is called amortization.

Taxes, Insurance and PMI

  • The remainder of the monthly payment to a lender may go to cover property taxes, homeowners insurance and, in some cases, private mortgage insurance (PMI).
  • By setting these funds aside in an escrow account, lenders ensure that those important bills are not neglected.
  • PMI protects the lender against loss if the borrower defaults on the loan and is most common among people who’ve made a down payment of less than 20 percent. This is because smaller down payments leave a greater portion of the total cost to be paid in the future.
  • Every month, the lender puts aside the money for these expenses in an escrow account and pays them when they are due. This allows lenders to ensure that these important bills are not neglected. Together, the principal, interest, tax, and insurance payments are referred to as PITI.

Other Fees

  • If you purchase a condominium, townhouse, or other type of unit with a homeowners association (HOA), you will likely have to pay dues.
  • This money goes toward property management, upkeep of the common area, and in some communities, certain utilities.
  • You may pay the dues directly to the HOA or through your lender.

Mortgage types

When securing a mortgage, it’s important to understand the differences between the types of loans that are available to you.

  • Fixed-rate mortgage: For a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan. While these are sometimes granted with a higher rate than other mortgages, the stability is appealing to many buyers.
  • Adjustable-rate mortgage (ARM): ARMs have a period of fixed interest, after which the interest rate and payment adjust at specific intervals. In general, the interest rate and monthly payment for an ARM start off lower than for a fixed-rate mortgage of the same amount. However, they can become higher once a few adjustments occur. An ARM may be a good option for people who plan to sell in a few years or expect their income to increase significantly, but it can be risky. If you cannot afford the payment increase, you may lose your home.

Mortgage terms

  • The term refers to the length of the loan.
  • The traditional mortgage term is 30 years, but it can range from 10 to 30 years.
  • In general, the shorter the term, the lower the interest rate.
  • Longer terms can generate lower payments, but the total interest paid over a 30-year loan is more than the amount paid over 10 years.

Government programs

  • Loans offered through federal government programs can come with more attractive features, such as lower down payment requirements for lower income applicants.
  • One of the most popular options is the FHA loan, insured by the Federal Housing Administration, a division of HUD (the Department of Housing and Urban Development).
  • Government loans can also be issued on the state and municipal level. Many states and cities coordinate programs specifically for first-time homebuyers.
  • These make it easier to buy a home by offering such things as down payment assistance, below-market-rate units and/or low-interest loans.
  • Contact your local housing authority for information about programs in your area.

At Bethpage Federal Credit Union, we operate more than 60 branches and shared service centers on Long Island, and thousands more nationwide. Contact us, apply online or stop in today to learn more about obtaining a mortgage that will bring you one step closer to the dream of home ownership.