What is PITI?
In case you're not familiar with the term, PITI is an acronym that stands for "Principal, Interest, Tax, and Insurance," where Tax refers to property taxes and Insurance refers to homeowner insurance.
If you've ever taken out a mortgage to purchase a home, you will know that lending institutions don't trust you to pay your insurance and property taxes on your own. And because they don't trust you, they build those payments into your monthly mortgage payment.
I guess I can understand why it's important to the lending institution that you stay current on your insurance and property taxes. After all, if your home burns down and you stop making your mortgage payments, the lending institution doesn't want to foreclose on a smoldering pile of charred rubble. Nor do they want to get stuck with a mountain of back-taxes if you default on your mortgage.
And speaking of a lack of trust, the lending institutions go one step further (to the delight of private mortgage insurers) by forcing you to pay private mortgage insurance premiums if your loan-to-value ratio is greater than 80% (less than a 20% down payment).
When you add up the earnest, principal, interest, property tax, insurance, and PMI payments and then calculate how many hours you will need to work to make all of those payments (the PITI mortgage calculator will do this for you), you can understand why I refer to PITI payments as ...
PITY Payments
I call them "PITY" payments because it's a pity that we didn't choose the Grow Slow, Pay As You Go method of home buying instead of the instant gratification method promoted by real estate and mortgage companies. Because had we done so we could have gotten wealthy just by investing the interest charges we wouldn't have had to pay to the lending institutions.
If you've spent any time on this site at all, you've no doubt ran across countless references to the term "Opportunity Cost," and now understand that it refers to the value lost when choosing one alternative action or inaction over all other possible alternatives. Well, because housing represents such a large percentage of our household budgets, it also stands to reason that nowhere will you find greater opportunity costs than in the area of home buying.
For example, if you buy a more expensive home versus and a less expensive home, you will suffer the opportunity cost of lost interest earnings that could have been earned with all the savings you would realize with the less expensive home. After all, the smaller and less costly the home, the lower will be the homeownership costs (property taxes, insurance, mortgage interest, utilities, repairs, maintenance, etc.).
As I hope you will discover throughout this home mortgage calculators section, the difference between the homeownership costs of a large, expensive, fully-mortgaged home and the ownership costs of a small, inexpensive, paid-for home can literally determine whether you will spend your life living paycheck to paycheck or if you will achieve financial freedom.