For many people, the tax advantages alone are sufficient reason to own a home. Normally, the amount of interest paid in the first ten years or so on the typical home is enough to justify itemizing your deductions on your income tax return. This will mean that you will pay less in state and federal taxes than you would if you were to have a rent payment equal to your house payment. The impact can be pretty dramatic. It effectively reduces that impact of the interest rate that you are paying on your mortgage to a lower rate because of the tax savings. Since the interest rate on a home you own is already among the lowest available, reducing it further due to tax savings makes home ownership a hard thing to pass on.

In addition, homes tend to increase in value over time. This increase in value is, in most cases, tax free under current law and provides a way for individuals and families who own homes to increase their net worth while providing themselves with a place to live. For example, suppose that you own a home that is worth $100,000. You put $20,000 down on it last year and you have just learned that the average home in your area has increased in value by about 5% since that time. Five percent of $100,000 is $5,000 and so your house could easily be worth $105,000 after only one year. However, you need to see the return in light of the money that you have put into the house. A five thousand dollar increase against a $20,000 investment amounts to a 25% return on the $20,000 that you put into the house only a year ago. This is not to lose sight of the fact that the house was purchased not as an investment but as a place to live. Even though you have had to make monthly mortgage payments and will need to do so until the house is paid off-many years from now, actually making money on the purchase is a bonus that should not be ignored.

While residential real estate tends to increase in value over time, the amount that you owe on the mortgage will decrease over time as you make monthly payments. At first this will be a rather small amount. As mentioned above, the payments that you make in the first several years of your mortgage are largely interest and only a small portion of it goes to pay off the mortgage. However, over time the amount of money that goes to principal and interest remains the same but with each passing month, more of it goes to principal and less of it goes to interest until the mortgage is paid off.

Like most other things, owning a home goes beyond the financial. There are some studies that suggest that family life actually improves when a family occupies their own home. It may be that the improved family life is a byproduct of something other than home ownership but whatever the cause, the impact is usually favorable.

There are numerous resources available to assist you with the purchase of a home; even programs available in many states that offer special different kinds of financial help to first time homebuyers. A list of important Internet resources is included at the end of this section.

The down payment is the amount of money that you put into the house when you first buy it. The purchase price of the house minus the down payment equals the mortgage that you will need to secure. If you are able to put down 20% (or more) of the purchase price you will avoid paying private mortgage insurance (PMI). This will mean saving money at closing and saving money each month. It is worth it to put down 20% even if it means securing a second mortgage to come up with the 20% because of the savings that normally result. The interest rate on the second mortgage is usually higher than on the first mortgage and the term is usually less than the standard 30 years. These two factors combine mean a high monthly payment than you would have with a single monthly payment of a larger first mortgage but the savings on private mortgage insurance is often sufficient to justify this course of action.

The mortgage is the amount of money that you borrow to purchase the home. They come in a variety of forms and you really need to consider your own personal financial situation before you make a decision.

ARM-Adjustable Rate Mortgage: This type of mortgage usually offers the lowest rate because the lender has the opportunity over the life of the loan to raise interest rates. The rate charged at any given time will be tied to an interest rate that the lender has no control over and can be a very valid option if you are reasonably certain that you will be selling before the rate adjusts to a level that makes the monthly payment difficult for you.

Fixed Rate Mortgage: This has traditionally been the most popular form of mortgage. The interest rate is fixed for the life of the loan (Usually 15 years or 30 years) and so the basic payment (Principal and Interest) is also fixed. Taxes and insurance costs can increase (and often do) but the basic payment remains the same.

Points: A point is 1% of the mortgage and is prepaid interest. If you plan to stay in your house for more than five years, it can work in your favor to pay points up front and then have a lower interest rate (and lower payments) for the life of the loan. Investigate how much you can save each month with a lower rate and compare the cost of the points to the savings. If the payback is less than three years, take it. If it is between three and five years and you plan to stay in the house that long, give it serious consideration. If it is more than five years, it may be best to pass on paying points.

When you invest in real estate, you are investing in a true market. While there is normally an asking price, the final price is negotiated between buyer and seller. The price at which a house or any other piece of real estate sells depends on a variety of factors, all of which impact the price but none of which dictate the final price that must be paid. That is how markets work. Other financial markets work in the same way but since there is a large pool of potential buyers and technological support, the process for other financial markets appears to be instantaneous. In reality, it is the same process, just much faster.

There are normally two other charges included in your monthly payment, both of which go into an escrow account. An escrow account is a type of savings account that the mortgage company uses to pay certain expenses on your behalf. They pay the taxes that are owed on your property and they pay the insurance premium that is owed to insure your property. They will adjust the escrow amount from time to time to insure that they are collecting enough money to pay the taxes and insurance with your money and not their own. They collect this money and pay it on your behalf to make sure that the house is always insured and that there is no chance that the government will place a lien on the house for nonpayment of taxes. It protects them but it also is in your best interest to have those two expenses paid when they come due.

Brokers: When purchasing a house, work with a buyer’s agent if at all possible. They will represent your interests better than someone who represents the seller. The seller pays them out of the proceeds of the sale but they should represent your interests from start to finish (closing) and beyond.

Closing: Before you can move in to the house that you have purchased, you will need to go through closing. As buyer, you come with the down payment and closing costs and the lender that you have selected provides the mortgage money. You sign quite a number of documents and in the end you own the house. The closing agent then pays off all of the mortgages associated with the house, pays the realtor fees and any other fees and costs associated with the house or the closing and remits the rest to the seller. It may seem like a lot to go through but we are indeed fortunate to be able to go through the process as quickly as we can. In other parts of the world, purchasing a piece of property can take as long as 20 years and involve hundreds of steps and dozens of governmental offices. The relatively short period of time that it takes here to complete a sale when you have a willing buyer and a willing seller makes a few minutes spent at a closing a small price to pay.

Closing Costs: You need to have some familiarity with closing costs. In addition to several of the items mentioned above (points, escrow, etc.) you will pay a number of other costs associated with transferring title from the sellers to you as the buyer. This will include recording fees, document preparation fees, etc. The best advice here is to have your broker take a look at the anticipated closing costs to insure that you are not being overcharged or double charged. For larger transactions, it would be good to have an attorney take a look at the costs associated with the closing.

From time to time, it may be advantageous for you to consider refinancing your loan. If interest rates have dropped below what you are paying, you need to investigate if it would be in your best interest to secure a new loan at a lower rate and pay off the current mortgage. It’s a whole new loan but often the savings can be significant. To determine if it would be in your best interest to do that, go through the worksheet provided and see how many months it will take you to “pay back” the cost of refinancing. If it is more than 60 months (5 years), it probably is not in your best interest to refinance. If it is less that 36 months (3 years) and you think you will remain in the house for that length of time, it is probably in your best interest to investigate further. If it is between 36 and 60 months, you will have to use your best judgment although a lot of people choose to refinance when they feel that they will be in the house long enough to pay back the costs associated with refinancing.

An easy way to get started is to contact your current lender and see if they are willing to refinance the loan in order to keep your business. At the same time, you need to be shopping for interest rates in the newspaper and on the web. You will be confronted with some of the same questions that you answered when you first obtained financing. What kind of loan do you want? Do you want fixed or adjustable? If you want fixed, do you want it for 30 years; 15 years, or some other term. If you want adjustable how often do you want it to adjust? The web sites below can assist you with the decisions associated with mortgages and refinancing.

Someone once said, “If you own things, they will break.” This is definitely true when it comes to houses. There is maintenance that has to be done in order to keep the house serving you and providing you with a good place to live. The basic decision that has to be made here is: Do I do the work myself or do I hire someone to do the work for me? You need to learn to do some basic home repairs because the amount of money that can be saved by doing some simple tasks is well worth the effort. A few good web sites are listed at the end of this chapter that will help you with some of the basic home repairs that everyone should know about and be willing to tackle.

When it comes to major repairs and extensive maintenance, if you enjoy doing that sort of thing and have the time to completely the task quickly, it may be in your best interest to take them on as well. However, many will find that it makes more sense to do what they do best and hire somewhat to do what they do not do best. It will mean more expense in the short run, but it can also mean more success with money management in the long run.

The average family stays in a home five years. Obviously some will stay longer and some will move more frequently but on the average, it’s about five years. This will mean selling your house to get the equity that you will need for the next house you will be purchasing. While there is money to be saved by selling the house yourself, there is also money to be lost. You will need to determine a value, advertise, be prepared to show it at all hours, negotiate a final sales price and arrange for all of the details associated with transfer of title yourself. It often makes more sense to have a real estate professional work on it for you.

WEB SITES:

http://www.usaaedfoundation.org/house/index.asp
www.factsfacts.com/MyHomeRepair/
www.hometime.com
www.doityourself.com
http://www.fanniemae.com/homebuyers/findamortgage/becoming/index.jhtml?p=Find+a+Mortgage&s=Becoming+a+Homeowner
www.homedoctor.net
www.hometips.com
www.bobvila.com
http://www.alta.org/consumer/closing.cfm