The home-buying process can be a little confusing, especially if it’s your first real estate purchase.

One of the most confusing aspects is the sheer volume of acronyms you will be bombarded with. CMA, TIL, COE, RESPA … the list goes on. 

Although your Realtor®, lender and escrow agent will all try to make sure they use understandable language with you, you’re likely to come across a few terms that sound like nothing more than alphabet soup.

Home-Buying Acronyms PITI

One that is important — and relevant to every home buyer who plans to finance their purchase — is PITI, which stands for principal, interest, taxes and insurance.

When you apply for a home loan, you will hear and see this acronym often. It’s a short way of describing the four components that make up your monthly house payment. So, P + I + T + I = your total monthly payment.

But what does each of these terms really mean?

Principal

Principal refers to the net amount you will be borrowing. Once you start making payments, a portion of each one will go toward paying down the original loan amount. In the early portion of your loan term, only a small amount of each payment will go toward paying down your principal.

Interest 

This refers to the amount of your payment that goes toward the interest on your loan. Most of your early payments will consist of interest. But as you pay down the principal over time, less of each payment will apply to interest.

Taxes 

This refers to the portion of loan that goes toward paying your property taxes. Most home loans collect a portion of the annual property taxes each month, and hold it in a special impound account. Then at the time each year the taxes are due, the lender pays them directly. 

In most cases, you can figure out how much of each payment goes toward taxes by dividing your annual property tax bill by 12. As your taxes go up (or, occasionally, down) from year to year, this amount will change, and typically, your monthly payment amount will adjust accordingly.

Insurance 

This refers to the portion of your payment that goes toward homeowners and (if applicable) flood insurance. Like taxes, the lender collects a portion of your annual premium from you each month and holds it in an impound account until the premium is due. 

You can determine how much of each payment goes toward insurance by dividing your total annual homeowners and flood premiums by 12. Like taxes, this amount can change from year to year, depending on your premium costs.

Your lender will advise you of your monthly payment based on principal and interest, and typically estimate the amount of your taxes and insurance. These figures will be important in the financing qualification process of home buying, and in helping you determine how much you can afford to pay for your house payment each month.

In Yorba Linda and the surrounding communities, The Edie Israel Team provides professional Realtor® representation for home buying and selling clients. The Israel team can assist you in understanding all the mysteries — and acronyms — of the home-buying process. Contact us today to learn more, or to schedule an appointment.