- 01PITI stands for Principal, Interest, Taxes, Insurance — and each piece behaves differently over time
- 02On a $300K mortgage at 6.5%, month one is $1,896 — but only $271 goes to principal
- 03APR includes origination fees and points — a 6.25% rate with 2 points has a higher APR than 6.5% with zero points
- 04Property taxes and insurance are the wild cards — they can swing your payment $200-400/year
Show Notes
I'm Martin Maxwell. You write a check for $1,847 every month. Or maybe $2,400. You call it "the mortgage." But it's not one number. It's four. Principal, Interest, Taxes, Insurance — PITI. Each piece behaves differently. Each piece has different rules. And if you're an investor, you need to know where your money's actually going. Let's tear it apart.
Introduction — your payment isn't one number
That $1,847? It's a blend. The bank doesn't care how you think about it. They just want the total. But for you — for your cash flow planning, for your DSCR when you're buying rental #2 — you need to understand the breakdown. Here's the thing: in month one, most of that payment goes to the bank. Not to you. Not to equity. To interest. Let that sink in.
P, I, T, and I — each piece explained
Principal — the part that pays down your loan. This is the only piece that builds equity. In month one on a $300,000 mortgage at 6.5%, it's $271. Out of $1,896. That's 14%. The rest? Interest.
Interest — the bank's cut. On that same $300K loan, month one is $1,625 in interest. You're paying the bank before you're paying yourself. That ratio flips over time. By year 15, you're paying more principal than interest. But early on? You're renting money.
Taxes — property taxes. Escrowed monthly. A $300K house in a 1.5% tax county might run $4,500/year. That's $375/month. It goes to the county. It doesn't build equity. It doesn't pay down debt. It's just a cost of ownership.
Insurance — homeowners or landlord policy. Same deal. Escrowed. $1,200 or $1,800 a year. Another $100–150/month. Not building equity. Just a line item.
P and I are fixed for the life of the loan — assuming no rate change. T and I aren't. They go up. Every year. That's the wild card. For investors running DSCR loans, the lender uses P&I in the ratio — not the full PITI. But your actual cash flow out the door includes T and I. So when you're underwriting a deal, use the full payment. Don't kid yourself.
The amortization reality: where money goes in year 1 vs year 15
On a $300K mortgage at 6.5%, your payment is $1,896. Month one: $271 principal, $1,625 interest. Month 180 — that's year 15 — you're at $1,089 principal, $807 interest. The flip happens somewhere around year 12. Until then, you're mostly paying the bank. For investors, this matters for LTV and payoff strategy. If you're planning to refinance or sell in year 5, you've barely touched principal. Your equity growth is mostly from appreciation — not from paying down the loan. That's why DSCR lenders care about the full P&I. They want to know your NOI covers that $1,896 — or whatever your payment is — with room to spare.
Rate vs. APR: the number that actually matters
You see 6.5% on the rate sheet. You think that's your cost. It's not. APR — annual percentage rate — includes origination fees, points, and other closing costs. A 6.5% rate with zero points might have an APR of 6.58%. A 6.25% rate with 2 points might have an APR of 6.72%. The lower rate isn't the better deal. You're paying $6,000 upfront to buy down the rate. Over 30 years, that might pencil out. Over 5 years? Probably not. For FHA-loan borrowers, the APR includes the upfront mortgage insurance premium. That can add half a point. Always compare APR. The rate is the headline. APR is the real cost.
The wild cards: taxes and insurance
Property taxes go up. Reassessments happen. Your $4,500/year bill today might be $5,200 in three years. Insurance? Same story. Climate risk, claims history, inflation. A $1,200 policy might become $1,500. That's $250 more per year — $21/month. Your escrow payment adjusts. Your "fixed" payment isn't fixed. For investors, this matters for cash flow projections. If you're underwriting a rental, you'd better be using conservative tax and insurance estimates. A $200/year swing in either direction changes your numbers. And in some markets — Florida, Texas, coastal California — insurance can swing $400 or more in a single year. That's a $33/month hit to your payment. Plan for it.
That's PITI. Four pieces. One check. Know where it goes. One last thought: if you're comparing an FHA-loan to conventional, the FHA payment includes mortgage insurance for the life of the loan if you put less than 10% down. That's another line item that doesn't build equity. Run the numbers. Sometimes conventional with a higher rate beats FHA with MI. Sometimes it doesn't. The only way to know is to break it down. Episode 78 answers the question you've been asking: who actually decides your mortgage rate? It's not your lender. It's the 10-Year Treasury. Subscribe so you don't miss it.
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