What is PITI? You may hear your monthly payment amount referred to as "PITI." This refers to the components of a monthly mortgage loan payment, which includes the following:

P - Principal

Portion of the monthly payment required to repay the original amount that you borrowed, excluding interest.

I  - Interest

Portion of the monthly payment required to repay the cost of borrowing the money.

T - Taxes

Portion of the monthly payment required to pay annual real-estate taxes for the property.

I - Insurance

Portion of the monthly payment required to pay for required hazard insurance.

For most borrowers, principal, interest, taxes, and insurance make up the total monthly mortgage payment and lenders look at these components to determine affordability.

Principal and Interest

Over time, as you make monthly mortgage payments your outstanding balance begins to steadily decrease. As a result, the interest you pay each month decreases. Over time, less and less of the monthly mortgage payment is needed to pay for interest (because the loan amount is decreasing) and the principal balance begins to reduce significantly. Depending on the type of loan you choose, this can happen sooner or later. For example, with a 30-year fixed loan, much of the money paid in the early and middle years of the loan term will satisfy interest. It may not be until the later stages of the loan that you'll see dramatic reductions of the principal. With a 15-year loan this process will happen more quickly.

Taxes and Insurance

Taxes and Insurance amounts can change over the life of the loan. Reassessments and changes in insurance premiums can result in this portion of the monthly payment decreasing or increasing. These components do not affect the portion of the payment used for principal or interest.

Mortgage Insurance

Borrower-paid Mortgage Insurance or an alternative is required when a borrower has less than a 20% equity position in a home. Borrower-paid mortgage insurance protects the lender from a borrower's potential default. When required, Old Second Bank will let you know how borrower-paid mortgage insurance may affect your monthly mortgage payment.