Fixed rate is not fixed payment
Taxes and insurance move.
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Mortgage basics: what PITI means
Principal, interest, taxes and insurance — the four parts of a typical monthly housing payment, and how they change over time.
In this lesson you will
- Name the four parts of PITI
- Explain how amortisation shifts interest to principal
- Know why a fixed-rate payment can still change
Lenders often describe a housing payment as PITI: principal, interest, property taxes and homeowners insurance. Many payments also include PMI and, for some homes, HOA dues are paid separately.
The four parts
- Principal: the part that repays the loan balance.
- Interest: the cost of borrowing.
- Taxes: property taxes, often collected monthly into an escrow account.
- Insurance: homeowners insurance, also often paid through escrow.
How the mix changes
On a fixed-rate loan, principal and interest together stay the same, but early payments are mostly interest. Over time more of each payment goes to principal. This schedule is called amortisation.
Why your payment can still change
Taxes and insurance can rise, and escrow is recalculated, usually yearly. A fixed-rate mortgage fixes principal and interest — not the whole payment.
Fixed versus adjustable
A fixed rate stays the same for the life of the loan. An adjustable rate can change after an initial period, within caps set in the contract. Read the caps and model the highest payment before choosing one.
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Three ideas to keep
Early payments are mostly interest
Principal grows over time.
Budget the whole payment
Plus maintenance outside PITI.
Do it in 4 steps
Find the PITI breakdown
On your loan estimate or statement.
Check the escrow analysis
Yearly.
Add maintenance
Around 1% of home value a year.
Model rate caps
If adjustable.
One month’s payment, broken down
Illustrative $300,000 loan at 6.5% for 30 years; taxes $3,600 a year; insurance $1,500 a year.
| Part | Monthly |
|---|---|
| Principal and interest | $1,896 |
| of which interest (first month) | $1,625 |
| of which principal (first month) | $271 |
| Property taxes | $300 |
| Homeowners insurance | $125 |
| Total PITI | $2,321 |
In month one, only $271 of $2,321 reduces the loan. That share grows every month.
Where this usually goes wrong
- Budgeting only principal and interest
- Ignoring escrow increases
- Choosing an adjustable rate without modelling the cap
Find your (or an example) loan estimate and write the four PITI amounts.
Tools and guides for this lesson
Quick quiz
1. What does PITI stand for?
2. Early mortgage payments are mostly…
3. Why can a fixed-rate payment rise?
0 of 3 answered
Puzzle
A $200,000 balance at 6% APR. What is the first month’s interest?
Show the answer
$1,000
$200,000 × 0.06 ÷ 12 = $1,000.