Buying a home can be one of the most rewarding investments you will ever make. However, it can also be one of the most costly. Estimating your monthly mortgage payment well in advance of purchasing can help you make smart decisions with your budget.
Many prospective buyers find it valuable to calculate a home’s monthly mortgage payment —before making any serious commitment—to gauge if it is a good fit for their budget. Read on to learn more about mortgage payments, including what PITIA is, and what your payments cover.
What is a Mortgage Payment?
A mortgage loan is a specific type of long-term loan used to finance the purchase of a home. A mortgage payment is the monthly amount you are required to pay toward your mortgage. The mortgage payment will vary widely depending on the amount of money borrowed (i.e. the “size” of the loan), the length of time within which the loan must be paid back (i.e. the “term” of the loan) and your interest rate.
The size and term of the loan will have the biggest impact on monthly payment. A higher loan amount or a shorter loan term will require higher monthly payments than a smaller loan amount or a longer loan term. However, your interest rate will also impact your monthly payment. The higher the interest rate, the higher your payments are.
What is PITIA?
The acronym PITIA stands for the five most important components of a monthly mortgage payment beyond the size and term of the loan, specifically:
Changing any of these five factors will affect your estimated monthly payment; let’s examine how each does so in its own way. (For the purposes of explaining each factor, we will use a $200,000 mortgage as an example.)
The Principal is the amount you actually borrowed from the lender. In the example of our $250,000 mortgage, the principal is $250,000.
When you first start making mortgage payments, most of your payment will go toward paying the interest (discussed below). However, the amount of principal you pay off will increase with every passing month, putting you one step closer to owning the home free and clear. In the final years of a loan, you will primarily be paying down the principal.
The Interest is what the lender charges for loaning you the money. The higher the interest rate on a mortgage, the higher the monthly payments will be. Since interest rates are a major component of affording a home, homebuyers are typically able to borrow more when there is a low interest rate.
When you first start paying off your mortgage, you will be paying mostly interest. As time goes on, less of your payment will go to interest and more will go toward paying down the principal. If you pay more principal in the beginning by making larger or extra payments, you will reduce the overall amount of interest paid over the life of the loan.