Lesson 1 of 25 · 6 min

The four parts of a monthly payment

A housing payment is four numbers added, and only two of them are the loan.

A monthly housing payment is four numbers added. The statement often prints one total. The four parts are principal, interest, property tax and insurance, written PITI. Only the first two belong to the loan. The last two are bills for the house, collected on the same cash date as the installment.

Kestrel Home Finance writes a principal of $312,650 at an illustrative 6.55 percent for 360 months. Principal-and-interest, the installment that retires that principal at that rate, is $1,986.45. Annual property tax is $4,180, so the monthly slice is $4,180 ÷ 12 = $348.33. Annual insurance is $1,644, so the monthly slice is $1,644 ÷ 12 = $137.00. The printed total is $2,471.79.

The last two figures are not interest and not principal. They do not shrink the $312,650. They do not accrue on it. They are estimates of bills that fall due on their own calendars, averaged into twelve equal collections so the cash leaving the account is one number. Track 5 lesson 11 is a statement that prints one rate and hides the legs. A housing payment is the same summary: one total, four machines.

What the single monthly figure conceals, because it is a sum rather than a loan:

Principal, the slice of this month's cash that reduces the $312,650.
Interest, the slice that pays this month's accrual on the unpaid balance.
Property tax, a bill for the house, collected monthly and paid when due.
Insurance, a bill for the house, collected the same way.

The payment is four numbers added. Two of them are the loan. Two of them are not. The statement that prints one total is hiding that split.

Key terms

PITI: Principal, interest, property tax and insurance, added into one monthly housing payment.
Principal-and-interest (PI): The installment that services the loan. It does not include tax or insurance.
Escrowed bills: Tax and insurance collected inside the payment. They are not interest and they are not principal.

Worked example

One total, four legs

Kestrel Home Finance. Principal $312,650, illustrative 6.55 percent, 360 months. Annual tax $4,180. Annual insurance $1,644.

Principal-and-interest: $1,986.45
Monthly tax: $348.33
Monthly insurance: $137.00
Printed payment: $2,471.79
Of that, the loan: $1,986.45

The $2,471.79 is a sum. The $1,986.45 is the loan. The $348.33 and the $137.00 are bills riding along.

Check yourself

Principal $198,400, illustrative 6.10 percent, 360 months. Annual tax $3,120. Annual insurance $1,296. What is principal-and-interest, what is each monthly bill, and what is the printed total?

A housing payment is four numbers added, the everyday version of a statement that prints one total and hides the legs Track 5 lesson 11 teaches you to split. Open How a rate reset actually appears on a statement →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.