What’s included in a mortgage payment: PITI, PMI and escrow

A monthly mortgage payment usually has four parts, known as PITI: principal and interest on the loan, plus one-twelfth of the yearly property tax and homeowners insurance. The servicer (the company that takes your payments, which is not always the lender that made the loan) collects the tax and insurance into an escrow account and pays the bills when they come due. On a conventional loan with less than 20% down, you may also have to pay private mortgage insurance (PMI) until enough of the loan is repaid. HOA dues, if you have them, are usually paid to the association separately, but they belong in the same budget.

Only principal and interest are fixed on a fixed-rate loan. Taxes and insurance are re-estimated every year, and PMI eventually ends, so the total can move even though the rate never does.

What does PITI stand for?

PITI is principal, interest, taxes and insurance. You will also see PITIA, where the A stands for association dues; Fannie Mae’s Selling Guide uses PITIA for the full monthly housing expense and counts mortgage insurance with the other insurance premiums. PMI protects the lender, not you: if you fall behind, it does nothing to keep you from losing the home.

Worked example: a $360,000 home with 5% down

Every figure below is an example assumption, not a current rate or a typical cost. Use your own from your Loan Estimate, tax bill and insurance quote.

• Home price $360,000, down payment 5% ($18,000), so the loan is $342,000, 95% of the price.
• 30-year fixed rate of 6.25%.
• Property tax of 1.2% of the price a year ($4,320), and homeowners insurance of $1,560 a year.
• PMI of 0.55% of the original loan a year, and HOA dues of $45 a month.

1. Principal and interest. The level payment $M$ on a loan of $P$ at monthly rate $r$ over $n$ months is

With $P$ = 342,000, $r$ = 0.0625 ÷ 12 and $n$ = 360, $M$ = 2,105.7528…, which rounds to $2,105.75.

2. Escrow. Tax $4,320 ÷ 12 = $360.00 and insurance $1,560 ÷ 12 = $130.00, so escrow is $490.00 a month.

3. PMI. $342,000 × 0.55% ÷ 12 = $156.75 a month.

Principal and interest are only 76.5% of what goes to the servicer. A quote that shows P&I alone understates this payment by $646.75 a month, or $691.75 once HOA dues are counted. On a Loan Estimate, compare the Estimated Total Monthly Payment on page 1, which includes mortgage insurance and escrow, not the P&I line. Its Estimated Taxes, Insurance & Assessments line shows which costs are escrowed.

What is escrow, and why do lenders require it?

Escrow (also called an impound account) is an account the servicer runs to pay your property tax and insurance bills. Many lenders require it so the bills are sure to be paid. An unpaid tax bill can lead to a tax lien, and a lapsed policy can lead the lender to buy force-placed insurance and charge you for it, which typically costs more. Without escrow, you pay those bills yourself, often as one or two large amounts a year.

Federal escrow rules (Regulation X) limit what the servicer can collect. Each month it may take one-twelfth of the bills it expects to pay that year, plus enough to keep a cushion of no more than one-sixth of the year’s total, or two months’ worth. In the example, that cap is $980.00 (one-sixth of $5,880). At closing, the servicer can also collect an initial deposit plus the cushion, which is why escrow shows up in your cash to close.

When does PMI end?

On a conventional loan, PMI generally ends automatically when the balance is scheduled to reach 78% of the home’s original value, and you can ask to cancel it sooner, at 80%. The Homeowners Protection Act sets these dates, plus a final one at the loan’s midpoint, for a single-family primary residence whose loan closed on or after July 29, 1999. Both percentages are measured against the home’s original value: the lower of the contract price and the appraisal at purchase.

In the example, the original value is $360,000:

• 80% is $288,000. Payment 121, the first of year 11, brings the scheduled balance to $287,488.13; payment 120 leaves it $93.39 above the line. That is the earliest scheduled date to request cancellation.
• 78% is $280,800. Payment 132, the last of year 11, brings the balance to $280,618.51. PMI must end then if you are current, so from payment 133 the payment to the servicer drops by $156.75 to $2,595.75.
• The midpoint comes after payment 180 (15 years), later than the 78% date here. It matters mostly for loans with an interest-only period, principal forbearance or a balloon payment.

Counting a premium in each of payments 1 through 132, PMI costs 132 × $156.75 = $20,691.00. For your own loan, the PMI disclosure you received with your mortgage should show the first date you can request cancellation.

Extra principal payments can bring the request date forward, because the 80% test can be met through actual payments. The automatic 78% date is fixed by the original schedule and does not move, so after prepaying you have to ask. See extra mortgage payments for the trade-offs.

The down payment decides how long PMI lasts. This table keeps the home and rate the same and holds PMI at 0.55% in every row (a real quote can vary with the down payment).

FHA loans, VA loans and mortgage insurance paid by the lender follow different rules. A loan classed as high-risk when it closed is also exempt from the 80% and 78% rules, though its PMI must still end by the final termination date; the PMI disclosure you got at closing says whether that applies to yours. Some lenders also offer low-down-payment loans without PMI at a higher interest rate. Whether that costs more or less than PMI depends on several things, including how long you keep the loan.

Are HOA dues part of the mortgage payment?

Usually not. Condo, co-op and homeowners association dues are normally paid straight to the association. A servicer may agree to collect them through escrow if you ask, but that is uncommon. Either way, they are a required monthly cost of owning that home, so count them in your budget and your debt-to-income ratio, using the figure from the listing or the association’s documents.

Why did my payment go up on a fixed-rate mortgage?

On a fixed-rate loan, P&I normally stays the same, so check escrow first. Once a year the servicer analyzes the escrow account, sends you a statement, and resets the deposit for the coming year. If taxes or insurance went up, two changes land together: the monthly deposit rises to match the new bills, and any shortage from the past year can be collected on top.

Continuing the example, suppose the tax bill rises from $4,320 to $4,680 (+$360) and insurance renews at $1,740 instead of $1,560 (+$180), and escrow pays both at the new amounts. To keep the arithmetic simple, assume the servicer holds the full $980 cushion and both bills fall due just before the annual analysis, when the balance should be down to that cushion.

1. New deposit: ($4,680 + $1,740) ÷ 12 = $535.00, up $45.00.
2. Shortage: the account paid out $540 more than it collected, so it holds $440 instead of $980. The cushion also resets to one-sixth of the new bills, $1,070. The shortage is $1,070 − $440 = $630. That is more than one month’s escrow payment, so the servicer can let it stand or spread it over at least 12 months: $630 ÷ 12 = $52.50 a month.
3. Result: the payment to the servicer rises from $2,752.50 to $2,850.00 (+$97.50) for a year. After that it settles at $2,797.50 ($2,105.75 P&I, $535.00 escrow and $156.75 PMI) if the bills hold steady.

So a $45 monthly rise in bills briefly shows up as a $97.50 jump. A smaller cushion means a smaller shortage, and a shortage of less than one month’s escrow payment can also be billed within 30 days. Ask your servicer whether you can pay a shortage in one sum instead.

Other common causes are an adjustable rate resetting, a temporary buydown or interest-only period ending, a change in PMI, new fees and servicer mistakes. Your monthly statement itemizes each part, so compare it with the previous one.

Why is most of an early payment interest?

Interest is charged on the balance still owed, and the balance is largest at the start. In the example, the first month’s interest is $342,000 × 6.25% ÷ 12 = $1,781.25. That leaves $324.50 of the $2,105.75 P&I to reduce the loan. Of the whole $2,752.50 paid to the servicer that month, only 11.8% pays down the debt.

Principal first exceeds interest at payment 228, in year 19. After five years you have paid $103,558.54 of interest and $22,786.46 of principal, and still owe $319,213.54. Over 30 years, interest totals $416,072.72, and the last payment is $2,108.47 because the payment and each month’s interest are rounded to the cent. This slow start is also why PMI lasts 11 years at 5% down. The amortization guide covers the schedule in more detail.

How do lenders use your housing payment in debt-to-income?

Debt-to-income (DTI) is your monthly debt payments divided by your gross monthly income, before taxes and deductions. The front-end ratio counts housing only. The back-end ratio adds your other debts. The housing figure is the full payment, not just P&I: Fannie Mae, for example, counts taxes, property and mortgage insurance, and association dues. Each lender and loan program sets its own limits, so use the ones your lender quotes.

Take a gross income of $10,500 a month, a car payment of $385 and a student loan payment of $135 (all example figures):

• Housing, including PMI and HOA: $2,797.50 ÷ $10,500 = 26.6% front-end.
• Housing plus $520 of other debts: $3,317.50 ÷ $10,500 = 31.6% back-end.

Running DTI on P&I alone ($2,105.75) would understate both ratios by 6.6 percentage points. When PMI ends, both fall by about 1.5 points.

What the example leaves out

• Upkeep and utilities: repairs, maintenance and utilities are never part of the mortgage payment.
• Cash to close: the down payment, closing costs and the initial escrow deposit are paid once, at closing.
• Future tax bills: if your home’s value rises, the tax bill typically rises too, and escrow follows.
• Other required insurance: flood insurance, if your lender requires it, can also be paid through escrow.

Try it

Open the mortgage calculator and enter:

• Home price: 360,000
• Down payment: 5% (or $18,000)
• Loan term: 30 years
• Interest rate: 6.25%
• Property tax per year: 1.2% of the price (or $4,320)
• Insurance per year: $1,560
• HOA dues per month: $45
• PMI: % of loan a year
• PMI rate per year: 0.55%
• PMI ends when the balance reaches: 78%

You should see P&I of $2,105.75, PMI of $156.75 and a total of $2,797.50, with PMI charged through payment 132, the payment that takes the balance to 78% or below. Switch “PMI ends when the balance reaches” to 80% to see the request date (payment 121). Change the down payment to 10% or 15% to reproduce the table above. For its 20% row, set the PMI rate per year to 0: the calculator charges any PMI rate you enter until the balance reaches the threshold.

In the debt-to-income calculator, enter a gross income of $10,500 a month, a monthly housing payment of $2,797.50 and, in place of the example’s three debts, other debt payments of $385 (car loan or lease) and $135 (student loan). That gives 26.6% front-end and 31.6% back-end.

To work backward from income to a price, use the home affordability calculator with the same rate, term, property tax (1.2%), home insurance, HOA dues and PMI rate, and your lender’s DTI limits. Leave its PMI threshold at 20%: there it is the down payment below which PMI is charged, not the 78% balance at which PMI ends. The mortgage extra payment calculator shows how extra principal shortens the loan. Enter the example loan (current balance 342,000, interest rate 6.25, time left 30 years) and 360,000 as the original home value, and it shows how much sooner the balance reaches $288,000, the 80% mark (payment 121 without extra payments).

These are educational estimates, not lending, tax or legal advice. Your Loan Estimate, escrow statement and PMI disclosure show the figures for your loan.