PSI Virginia Real Estate Practice Exam

Which components are included in PITI payments?

1. Loan interest and homeowner's association fees

2. Principal, interest, taxes, and insurance

3. Property tax and maintenance costs

4. Only interest and principal

The correct answer is: Principal, interest, taxes, and insurance

PITI payments consist of four key components that are essential to understanding monthly mortgage obligations for homeowners. The correct answer includes Principal, Interest, Taxes, and Insurance: 1. **Principal** refers to the portion of the mortgage payment that goes toward paying down the original loan amount borrowed. Over time, the principal payment increases the homeowner's equity in the property. 2. **Interest** is the cost of borrowing the money from the lender, calculated as a percentage of the outstanding loan balance. This amount decreases over time as the principal is paid down. 3. **Taxes** typically refer to property taxes, which local governments impose on real estate. This portion of the payment is important because it funds local services such as police, fire departments, and schools. Mortgage lenders often collect these taxes as part of the monthly payment and hold them in an escrow account to ensure the taxes are paid on time. 4. **Insurance** generally pertains to homeowner’s insurance, which protects the property against damages and liabilities. Lenders may also require that the homeowner obtain mortgage insurance if the down payment is below a certain threshold, further protecting their investment. Understanding these four components helps homeowners and potential buyers grasp the total cost associated with owning a property and influences their budgeting and financial planning