When you buy a home, taxes are one of the expenses that can make a significant difference in your monthly mortgage payment. Once you apply for a mortgage, you’ll see the acronyms P&I or PITI. These will depend on how you’re including your taxes in your monthly payment. Let’s break these down quick.

P&I

This stands for principal and interest. How much you borrow to buy your home is called the principal. Both are parts of your monthly mortgage payment that go toward paying off the loan you borrow. P&I does not include property taxes or hazard insurance. However, these are pretty easy to calculate. The average in MN for hazard insurance is about $1300 per year. Let’s say the property taxes for the home you’re looking at is $3000 per year. $1300 + $3000 = $4300. $4300 / 12(months per year) = $358.33. That is the amount that should be set aside per month for your taxes and insurance. Keep in mind that most counties collect property taxes twice per year.

PITI

PITI stands for principal, interest, taxes and insurance. It’s typically quoted on a monthly basis and is compared to the borrower’s monthly gross income for computing the individual’s ratios, which are used to approve mortgage loans. Generally, mortgage lenders prefer PITI to be equal to or less than 28% of a borrower’s gross monthly income. These are all important factors to calculate when you want to determine exactly what the cost of your new home will be.