Principal, Interest, Taxes, Insurance (PITI)

When you try to figure out how much you can afford as a monthly mortgage payment, you need to think about more than the payment itself. Your monthly payment will be a combination of your mortgage's principal, plus interest, taxes, and insurance.

PITI is a handy acronym that can help you remember all of the various parts of your monthly cost of homeownership:

• Principal
• Interest
• Taxes
• Insurance

Let's break these down and explain them.

This is, basically, the amount of money you actually borrow in the form of a mortgage. If your mortgage is for $250,000, then your principal is the same amount: $250,000. This is the amount you'd need to repay to the lender -- if the lender didn't charge interest.

This is the money your lender charges you for the privilege of borrowing all that principal. It's expressed as a yearly percentage. Since the interest on a mortgage compounds monthly, constantly adding to itself over time, the math needed to determine your interest payment can be a little tricky.

Typically, your mortgage payments will be mostly interest in the early days of your loan repayment. As you pay off more and more interest, you'll start chipping away more of the principal with every payment.

Your property taxes can be a significant expense, depending on where you live and your home's assessed value. Property taxes may be collected at the state, county, and city or town level. Property taxes vary widely from one area to another. When you make an offer on a home, be sure to calculate your tax rate and include those payments in your budget.

Also, be prepared to pay your property taxes upfront when you buy your home. Your lender may require you to deposit several months or a year's worth of tax payments into an escrow account when you purchase your home. Your tax payments are then deducted from this fund throughout the year.

This can refer to a few different types of insurance. First and foremost comes homeowners insurance, which you'll be required to have in order to secure a mortgage. This insurance protects you in the event that your home is damaged, and also in the event that someone is hurt or suffers property damage while on your property. You may also need flood or earthquake insurance, if you buy a home in an area prone to that type of disaster.

Also, if you put down less than 20% of the home's purchase price for a down payment, you may be required to pay mortgage insurance. This is an extra fee that lenders collect to help offset the risk of borrowers with less "skin in the game" defaulting on their loans.

As with your tax payments, your insurance payments may be collected up-front and placed into an escrow account. Your monthly insurance payments are then drawn from this fund.

Granted, there's no "O" at the end of PITI, but there probably should be. There are a few other expenses that may factor into your monthly home payment. The most common of these affects owners of condominiums; monthly HOA dues that cover the cost of building maintenance and some utilities.