In a loan agreement, the term 'PITI' refers to what?

The term 'PITI' stands for Principal, Interest, Taxes, and Insurance. This acronym is commonly used in the context of mortgage loans to refer to the four key components that make up a borrower's monthly mortgage payment.

• Principal: This portion of the payment goes toward paying down the original loan amount.

• Interest: This is the cost of borrowing the money, calculated as a percentage of the remaining loan balance.

• Taxes: Property taxes are often included in the monthly payment and are typically set aside in an escrow account by the lender to ensure that these taxes can be paid when they are due.

• Insurance: This refers to homeowners insurance, which protects the property against damages and is also typically escrowed in monthly payments.

Understanding PITI is crucial for borrowers, as it provides a full picture of their financial commitment each month beyond just the loan's principal and interest. It helps in budgeting and effectively managing overall housing costs. The other options include terms and phrases that do not accurately encompass the essential components that are integral to most mortgage agreements.