How to Determine the Estimated Payment for Principal Interest Tax and Insurance Before You Buy a House

Updated on October 22, 2013
MarleneB profile image

Marlene is a California real estate broker/REALTOR®, selling property since 1989. California Bureau of Real Estate License #01056418.

Normally, your real estate or loan agent estimates the Principal, Interest, Tax, and Insurance for your loan. But, you can do it too!
Normally, your real estate or loan agent estimates the Principal, Interest, Tax, and Insurance for your loan. But, you can do it too! | Source

The Wake-Up Call

It was 2:00 a.m. on a Sunday morning when the phone rang. “Hello?” I answered the phone, barely awake. “Hello… Marlene?” The caller on the other end of the line didn’t recognize my voice. Grogginess impaired my speech. Nevertheless, the person at the other end of the line had to be sure it was me before continuing to speak. “Yes. This is Marlene.” I confirmed, becoming fully awake when I recognized that the voice on the other end of the line was a client. My eyes caught a glimpse of the LCD numbers on the bedside clock proudly displaying the time of day. Suddenly, I realize this is a ridiculous hour to be on the phone with anyone, and even more ludicrous to be on the phone with a client. “Marlene, this is Joe.” (The name has been changed to protect the innocent.)

Why was Joe calling his real estate agent at 2:00 in the morning, you ask? Well, because earlier (the day before) Joe and I had been out looking at properties. Joe decided that he liked one of the properties and wanted to know what his monthly payment would be if he made an offer on that property, so Joe called his real estate agent – me. I did, after all, tell Joe that if he needed more information on any of the properties he could call me. I didn’t know I should have provided a disclaimer that Joe shouldn’t call me at bizarre times, moreover, at my home.

More About PITI

For a deeper exploration of PITI and what PITI means to a buyer, please read my article titled Principal, Interest, Tax, and Insurance | The Most Important Number a Buyer Needs to Know

Joe Wanted to Know About His Principal Interest Tax and Insurance

My experience with Joe made me realize that even though I may not be up at all hours thinking of buying my first home, my clients were thinking of it all hours of the day. I got up and gladly gave Joe the information he needed, but that call prompted me to show clients how to get the information they need during off hours.

Joe was thinking of offering $200,000 on a home he saw and wanted to know what his monthly payments would be. Joe wanted to know what his Principal, Interest, Tax, and Insurance, or PITI would be if he put $40,000 down on the home.

As real estate and loan agents, we don’t expect buyers to compute the PITI, but it is good to show them how to do it, in case they want to do it themselves.

Loan Type

Most likely, you have been qualified for a loan and so your real estate agent or loan agent may have already suggested a loan type for your purchase.

The Easy Way to Compute the PITI

For each element of the PITI calculation, I will show you the tool or the formula to use, and where to look to find the information that you need to calculate your PITI.

First, you need to know what type of loan you will be using to purchase your home. This information will come from your lender. There are many types of loans. The most common types of loans for home buyers are explained here:

  • Amortized Loan is a repayment plan that consists of both the principal and interest. Payments are usually divided into equal amounts for the length of the loan. Essentially, your final loan payment will be the same as your first loan payment throughout the entire loan term.
  • Interest Only Loan is a payment plan that covers the interest amount of the principal only. With Interest Only loans, you are only paying the interest on the loan, therefore your monthly payments do not reduce the principal balance. The principal is repaid at the end of the loan term.
  • Partially Amortized Loan is a repayment plan where the loan is not fully amortized over the life of the loan, so at the end of the loan term, there is a balance of the principal that you will need to pay. The balance left at the end of the loan is known as a balloon payment.

If you don't know what type of loan you will be using and you want to work on generating an estimate on your own, then for the sake of this exercise, it is safe to assume you will be using an amortized loan.

Calculate Principal and Interest

Use an online financial calculator like ZimpleMoney.com.

Principal and Interest

To calculate the principal and interest on a loan, you will need to use a financial calculator. Since financial calculators differ in how they are used, I highly recommend you use an online financial calculator that calculates the principal and interest for you. Just about every online bank or mortgage company has an online financial calculator to help borrowers compute the principal and interest on their proposed loan. The online financial calculator I have found to be the easiest to use is found at ZimpleMoney.com. This website is user-friendly, allowing you to see the information without having to submit personal information.

To use the online financial calculator, you will need to have the following information handy:

  • Loan Amount (The amount of money you are borrowing to buy the house.)
  • Interest Rate (Your loan agent may have already told you what this is. If not, visit your lender's website to discover the likely interest rate for the day.)
  • Type of Loan (For example: Amortized, Interest Only, or Partially Amortized)
  • Loan Term (In months or years)
  • Payments Made (For example: Monthly, Quarterly, or Annually)
  • Interest Start Date (For your fixed rate loan, this is the date you receive the loan. For other loans, you will need to get this information from your lender.)
  • Payment Start Date (This is the date you will make your first payment.)

EXAMPLE Principal and Interest Using ZimpleMoney.com

Loan Term
Value
Loan Amount
$160,000
Interest Rate
4.5%
Type of Loan
Amortized
Loan Term
30 Years
Payments Made
Monthly
Calculate Interest From
November 1, 2013
Payment Start Date
November 1, 2013
Example Principal and Interest Calculation used at ZimpleMoney.com. Insert your own information matching your house payment scenario.

For the above scenario, the following information was the result after using the ZimpleMoney.com online financial calculator:

  1. Periodic (Monthly) Payment: $807.66
  2. Final Payment: $807.66
  3. Due on: 10/1/2043

If you are working with a real estate agent, your real estate agent may have already given you an idea of what the property tax rate is for the area you are looking to buy a home.

Tax

Tax is the property tax that you will have to pay the tax collector each year. You can estimate your monthly property taxes, but first you need to know what the property tax rate is for the area where you wish to purchase the house. Every city, county, and state is different, so you will need to discover that information first before calculating the property tax amount.

To find out what the property tax is for a home, first you will need to have the address of the property. Then, there are several ways to locate the property tax rate for that property.

Calculate Monthly Tax Payment:

(Tax Rate X Property Value) ÷ 12 = Monthly Tax Payment

Go to the county assessor’s office or recorder’s office where the house is located. The clerk can search for the address and give the information to you in person. Or, they may send the information to you by mail. Some counties have tax records online, so you may be able to retrieve the information online.

To find the tax rate online, the quickest way is to go to Google and type in the name of the county and the words, “county property tax rate”. Then, scroll through the page results looking for the page that has the assessment information in it.

Now that you have the property tax rate:

Multiply this rate by the purchase price, then, divide the result by 12 to get the monthly figure. At this stage, the purchase price will be an estimate, since you have not actually made an offer on the house yet.

Calculate Monthly Homeowner’s Insurance

(.0050 X Property Value) ÷ 12 = Monthly Homeowner’s Insurance

Insurance

Homeowner’s Insurance

Homeowner’s insurance, also called hazard insurance, is the insurance you pay in case the home is damaged, for example by earthquake, fire, flood, and theft. To estimate your monthly homeowner’s insurance, you will need the property value. In this case, it is the price you estimate that you will purchase the home. Then, multiply that value by .0050. The result will give you a reasonable approximation of what the annual insurance cost will be for the home. Then, divide the result by 12 to get the monthly figure.

Private Mortgage Insurance (PMI)

If you are putting 20% or more money down toward the purchase of your home, then you do not need to calculate Private Mortgage Insurance. If, however, you are putting less than 20% down to purchase your house, then you need to calculate Private Mortgage Insurance.

Estimating Private Mortgage Insurance is a little bit tricky. Part of the calculation is based upon the Loan-to-Value and any kind of buy-downs or other intricacies of your loan.

Loan-to-Value

The Loan-to-Value refers to the amount of the loan compared to the value of the home. It is referenced as a percentage. For instance, if you put 20% down on a home, the Loan-to-Value would be 80%; likewise, if you put 5% down on a home, the Loan-to-Value would be 95%. Calculate the Loan-to-Value by dividing the loan amount by the value of the property.

Example: If you put $40,000 cash down to purchase a home valued at $200,000, the loan would be $160,000. $160,000 ÷ $200,000 = 80%.

Once you have the Loan-to-Value, you will need to use a PMI chart to generate a reliable estimate. This chart can be found online. Your lender’s website is likely to have a PMI chart for you to use.

Calculate Monthly Private Mortgage Insurance

(.0052 X Loan Amount) ÷ 12 = Monthly Private Mortgage Insurance

But, let’s keep it simple.

Just for the sake of generating an estimate, allow me to provide a functional number. Just keep in mind that this number is for approximations only. You will need to ask your lender for the “true” number for a more exact picture.

So, let’s use .0052 as the PMI rate regardless of the Loan-to-Value. Using this rate, calculate PMI by multiplying the PMI rate by the loan amount, then divide the result by 12 to get the monthly figure.

Table of Tools and Formulas at a Glance

The following table is a compilation of the elements needed to compute the Principal, Interest, Tax, and Insurance. It is provided for easy reference to use in calculating the PITI.

Please use the information with the assumption that the results will produce an estimate of your monthly payments. To obtain accurate information, you will need to consult with your loan agent.

Table of Tools and Formulas at a Glance

Element of PITI
Formula for Monthly Payments
Where to Find the Information
Principal & Interest
Use online financial calculator
ZimpleMoney.com
Tax
(Tax Rate X Property Value) ÷ 12 = Monthly Taxes
Contact the County Tax Assessor’s office or Google “Find [county name] county tax rate”.
Homeowner’s Insurance
(.0050 X Property Value) ÷ 12 = Monthly Homeowner’s Insurance
Use .0050. This is a number that is used liberally throughout the mortgage industry.
Private Mortgage Insurance
(.0052 X Loan Amount) ÷ 12 = Monthly Private Mortgage Insurance
Get the PMI rate from your lender or find the PMI Chart at your lender's website. In the meantime, use .0052.
This chart provides an easy reference for tools and formulas used in calculating the estimate for Principal, Interest, Tax, and Insurance.

Financial Calculators

Financial calculators make finding your monthly payment easy.
Financial calculators make finding your monthly payment easy. | Source

Using a Financial Calculator to Find the PITI

If you’re really ambitious, you can use a financial calculator to determine the PITI without using a lot of formulas. It is a bit challenging, but the calculators come with an owner’s manual, plus there are excellent online tutorials. In the following video titled, How to Calculate Loan Payment, you will see how to find the mortgage payment using Texas Instrument's BA II Plus Financial Calculator. In my opinion, the BA II Plus is the least expensive and easiest financial calculator to use.

How to Calculate Loan Payment (With the Texas Instruments BA II Plus Financial Calculator)

Texas Instruments Financial Calculator

Yes! You Can Calculate Your Own Monthly Mortgage Payment

Now that you know how to calculate the estimated principal, interest, tax, and insurance - your monthly mortgage payment on a house you’re thinking of buying, the question becomes, “Why would you want to do that?” Oh, I know… so you don’t have to wake up your agent at 2:00 o'clock in the morning. I get it!

"Real estate information; clear and simple!"

Marlene Bertrand is a Broker/REALTOR®.
Calif. Bureau of Real Estate Lic. #01056418.

Questions & Answers

    Comments

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      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Hello markdarmafall. It's a great time to get back into the real estate field. Although I still have my license, I'm retired from active "duty" now but I still enjoy keeping up on the industry. As an investor, this is a great time to jump back in. Prices are still favorable for investors right now.

      • markdarmafall profile image

        Mark 

        4 years ago from Moundsville,WV

        Thanks for the wonderful read here. My wife and I are in the process of returning to the real estate investing field and the knowledge that you provide will help us tremendously. Thanks

        Mark

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Thanks for looking out for me, Writer Fox. I never even considered adding an Amazon capsule for calculators. Great idea. The one by Texas Instruments is a really good one, too. I think it's the easiest one of all to use.

      • Writer Fox profile image

        Writer Fox 

        4 years ago from the wadi near the little river

        Very good and very clear explanation of calculating mortgage payments. Incidentally, Financial Calculators are available on Amazon and you might want to add one to your article. I use and recommend the one from Texas Instruments. Enjoyed and voted up!

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Thank you, catmalone! The majority of my buyers were first-time buyers. Most of them were like Joe. I can't say that I blame them because buying a house is a huge commitment and expense. I'm actually glad Joe taught me to be sensitive to that early in my career.

      • catmalone profile image

        catmalone 

        4 years ago

        Wow! Another awesome hub on real estate. Great story told in the beginning. I can relate to Joe because when I bought my first home it was scary and you want answers to a lot of questions and sometime immediately not realizing the time because the anxiety you have when you buying your home. Great hub with a lot of useful information.

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Hi drmiddlebrook. It's interesting how the brain works. When I read your comment, my brain already read, "keep the scary dreams away". I guess because I know you, I already knew what you meant. Totally interesting.

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Hello drmiddlebrook! Thank you for your compliment. After my encounter with Joe, I realized how scary buying real estate can be. But, I learned that the more a person knows about something, the less scary it is.

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Hello Faith Reaper. Yes, it is interesting how that incident happened 20+ years ago, yet I still remember it as if it happened yesterday.

      • MarleneB profile imageAUTHOR

        Marlene Bertrand 

        4 years ago from USA

        Hello Bill! Yes, Joe was actually a lot of fun to work with. He was one of my first clients, so that's why I took his wake-up calls. Joe taught me that the more I taught buyers about buying a home, the easier the process felt for them. For Joe, buying property became like buying candy. I can't tell you how many houses Joe has bought and sold through me. Yep! Joe taught me a lot about ignoring personal boundaries when it came to working with new buyers. Because, to a first-time buyer, buying a home is so scary they just can't sleep at night until they get the answers they need. So, 2 a.m. became "late in the day", and 5 a.m. became "early in the day".

      • drmiddlebrook profile image

        Sallie B Middlebrook PhD 

        4 years ago from Texas, USA

        MarleneB, I meant to say "keep the scary dreams away." I tried to edit my comment, but Hub Pages wouldn't allow me to, even though I had a 5-minute window in which I was supposed to be able to fix it!

      • drmiddlebrook profile image

        Sallie B Middlebrook PhD 

        4 years ago from Texas, USA

        Another good one, MarleneB. This is going to help keep the "scary dreams" for a lot of would-be homeowners. As Halloween approaches, the beginning of your article reminded me what a "horror story" finding and purchasing the right home can be. Thank God for caring real estate professionals, like you, who are willing to "hand hold" with their clients throughout what seems to me to be an unnecessarily frightening process!

      • billybuc profile image

        Bill Holland 

        4 years ago from Olympia, WA

        I'm sure you were much more patient with Joe than I would have been at two a.m. LOL Great introduction; you had me hooked and that is half the battle for a writer. Well done Marlene; you answered a question every home buyer has asked or will ask.

        Have a great Sunday my friend.

      • Faith Reaper profile image

        Faith Reaper 

        4 years ago from southern USA

        Hi Marlene, what an introduction there, and I love how your experience at a time of the very early morn, gave you the inspiration to write this useful hub here.

        Up and more and sharing

        God bless, Faith Reaper

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