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Financial Education for Everyone

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December 11, 2006

When my wife and I signed our first mortgage in 1999, we had to keep convincing ourselves we were doing the right thing. Renting was safe, but buying a home was a major commitment with many big risks. We had long weighed the pros and cons of buying a home and ultimately decided to take the plunge.

But homeownership is not always right for everyone or at every stage of life. With the real estate market softening nationwide, what seemed like a “no brainer” for many years has become a more complicated decision. It’s a long-term commitment filled with expenses (expected and unexpected) and responsibilities.

That said, the upsides of owning a home – not to mention the tax advantages – are why two-thirds of Americans are homeowners. It can be one of the best long-term investments you can make for your financial future.

Here are a few of the many things to keep in mind:

Planning. If you eventually want to own a home, start planning now. It may take years to save enough for a down payment and closing costs. You’ll also need to calculate how much you can afford to pay for a monthly mortgage, homeowner’s insurance, property taxes, furnishings and maintenance or repairs. And while owning may seem costly compared to rent, you can write off much of your loan interest and some closing costs from your taxes.

Qualifying for a loan. Even if you’ve saved enough, if your credit rating is poor, you may either not qualify for a loan or have to pay a higher interest rate. Work on repairing your credit at the same time you launch a savings plan.

Down payment. Many loans are now available with down payments of 10 percent or less, particularly for first-time homebuyers. However, the lower the down payment, the higher your monthly payments. Your bank’s mortgage specialist or a reputable mortgage broker can walk you through scenarios that fit your situation.

PMI. If you don’t put at least 20 percent down, you will likely be required to purchase Private Mortgage Insurance (PMI), which protects the lender if you default on your loan. Once your loan principal amount drops to 80 percent of your home’s total value, you can jettison PMI. It can be very costly (up to 20 percent of your monthly payment), so get rid of PMI as soon as you can.

Mortgages. Common mortgages available include fixed rate, adjustable rate, interest-only, jumbo (over $417,000) and sub-prime (for poor credit risks). I’ll discuss these in a future column. In the meantime, for a comprehensive overview of how different mortgages work, check out Bankrate.com’s Mortgage Basics section (www.bankrate.com/brm/green/mtg/basics-toc.asp).

Another good resource is Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc. (www.practicalmoneyskills.com/homeowner). It contains a nine-step guide to homeownership, including preparations you should take to qualify for financing and a discussion on how real estate agent commissions work. It also has an interactive calculator that helps you estimate how much you can afford to spend on a home.

Homeownership is not without its share of headaches – like the time when all the Eisenhower-era appliances in our first home died within a four-week period. But in the long run, it’s a strong investment in your future – and besides, it’s nice to be your own landlord.

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This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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