Q: I live in a community in which at least two newcomers bought the biggest house they could afford. Being inexperienced, first-time home buyers, they estimated their costs on the long-standing real estate principal, interest, taxes and insurance (PITI) calculation. That, of course, left out utilities and maintenance.
The new neighbors didn’t think far enough ahead to realize that costs for natural gas, electricity, water, sewage, trash collection and even long-term costs like replacing the roof, are all expenses that will need to be paid. So please change the calculation from PITI to PITIUM, which is pronounced Pity 'Em.
A: Your letter and suggestion made us chuckle. But after we stopped laughing, we realized how on-target your suggestion is.
You are absolutely correct that there are a fair number of buyers (first-time in particular) who underestimate the true costs of homeownership. It's so much more than simply making that monthly mortgage payment, even if the taxes are included through a real estate property tax escrow.
In fact, many first-time home buyers are used to a rental arrangement where the landlord takes care of most issues relating to a home, including pest control, minor repairs, major repairs and other customary and routine items that go along with homeownership. When you buy a single home, you are responsible for all of that; there is no landlord to call. If you live in a condominium or co-op building, you might have a maintenance person who will deal with repairs to the building’s common elements, but you may still be responsible for a share of the costs, or even the whole thing.
First-time homeowners are often buying at the very edge of affordability, and that issue is compounded by their never having been to the home-buying movie before. It’s not surprising that first-time homeowners find their budgets under stress, sometimes even in the first few months of homeownership, like when the water heater blows unexpectedly or a hailstorm damages the roof (and now they have to pay the insurance deductible).
Home maintenance can cost a serious amount of money, and sometimes the repair bills are unexpectedly huge. In fact, we often suggest homeowners find a way to set aside several thousand dollars a year for home maintenance projects, such as blacktopping the driveway, cleaning the gutters or re-caulking windows. Even brand-new homes require maintenance, though those costs may be less in the first few years.
Moving is expensive. Beyond the actual costs incurred for the move itself, home buyers generally spend a lot of cash on furniture, furnishings and other household goods. But, homeownership is expensive, too, and since 40 percent of Americans families don’t even have $400 in an emergency savings account, maintaining the big investment you just made has to be a priority. You should always keep some savings set aside for various home repair issues that will come up.
You are right to point out that some first-time home buyers just don’t understand what they’ve signed up for, and that could hurt them in the long run. It could also hurt you, because if the home winds up being unaffordable and the homeowners can’t sell it for at least the amount they owe, it could drag down everyone’s home value. And, that would be an unfortunate result for all.
We’d rather not pity them (or PITIUM, as you so cleverly put it), but would rather educate them to become better homeowners and lessen their financial stress. Years ago, Ilyce wrote a book called “100 Questions You Should Ask About Your Personal Finances” to help homeowners and others navigate the financial waters. Today, Ilyce’s company, Best Money Moves, works with employers to give their employees the tools to lower their financial stress and lead happier, more productive lives.
Through education, information and helpful tools, home buyers and others can learn to be smarter about how they spend their money and how to stay within their budget. And, we can tell you that if you buy a home you can easily afford, you’ll sleep a whole lot better.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the chief executive of Best Money Moves, an app that employers provide to employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate lawyer. Contact them through Glink’s website, ThinkGlink.com.