Buying a home has to be one of the most exciting, yet stressful financial decision that most people will have to deal with. You can spend years saving up for a down payment, months touring homes looking for the right one, and weeks trying to find the best mortgage. With all of the effort going into this single decision it’s obvious you want to avoid any mistakes. Even once you find the home of your dreams, your job isn’t done yet.

It’s time to make an offer. This part of the process is not to be taken lightly because an accepted offer becomes a binding contract. If you realize too late that you may have made a mistake you could end up losing your deposit or earnest money at the very least. So, before you make that offer it’s your last chance to negotiate the best deal. Don’t squander the opportunity. Here’s what you need to know before making an offer.

1. Never Fall in Love With a Property

This is the cardinal sin of buying real estate. When you’ve spent a month or more walking through countless homes and finally find the one that’s perfect you’ll obviously be excited. Your hard work and patience has paid off so you’re thrilled to be moving forward with the process. The problem with falling in love with a house is that you become emotionally attached to it and that can cloud your decision making process. The seller has you right where he wants you.

Once you’ve emotionally committed yourself to a particular home you’ll stop at nothing to make sure you get it. This might mean stretching your budget more than you had planned, getting a mortgage that isn’t ideal because you don’t want to wait, and most importantly, you’ll lose the negotiation game. Rather than trying to get a better deal for yourself you’re far more likely to take whatever the seller is offering just to make sure you get the home. This is a mistake that could literally cost you tens of thousands of dollars. Don’t fall in love with a single property, and even if you did find the perfect home, keep a clear head and make sure you do what you can to get into the home with the best deal possible.

2. Find Out What You Can About the Property and Owner

The listed price isn’t always what the home is worth. It’s that simple. Homes go up for sale for a variety of reasons. Some need to move out of necessity, some people simply want to upgrade to a bigger home if they can, and others might be just looking to cash in on the equity they’ve built. You could take the same exact house and a seller in each of those situations would value and price their home at very different levels.

Someone who needs to sell their home because of a financial hardship or relocate for a new job is usually going to price their home far closer to the true market value than someone who really has no need to sell other than to hopefully make a little money on the sale. This can also help you identify areas to negotiate on.

Granted, you may not be able to just flat out ask the owner why they are selling, or even get a true answer if you were able to, so it’s up to you to do a little detective work. Start by looking at the history of the listing. When was the house listed and how long has it been on the market? Has the seller reduced the price over the months or has the price remained firm? These two pieces of information alone will tell you a lot about the owners. A home that’s been on the market for six months and seen little if any reduction in price is more than likely owned by someone who isn’t in a rush to sell and isn’t likely to negotiate much. It’s also a sign that they have put a price on the home that isn’t in line with reality. On the other hand, if you come across a property that’s only been on the market for six weeks and the seller has already reduced the price a few times you could be on to someone who really needs to get out as soon as possible and they are likely willing to negotiate.

Have a little spare time on your hands? Try searching your county’s public records for information on the property and the owner. When it comes to things like property title transfers and deeds most of it is public record. A lot of cities and counties even provide free searches on their websites. With this information you can obtain details such as when the previous owner bought the property and if they took out a mortgage, how much they borrowed. This information can be quite valuable. You may find that someone purchased the home five years ago with little or no money down and then see that their asking price is almost exactly what they probably still owe on their mortgage. Now you’ve discovered why the home is priced where it is. It’s not because it’s worth that much, but instead it’s because the sellers simply don’t want to resort to a short sale. Knowing this information ahead of time will give you an idea of how much potential room you have to negotiate down.

3. Get Comparable Sales Data

When you are ready to make an offer that’s lower than the listed price it’s good to back it up with facts. If you make a lowball offer just for the sake of trying to get a good price you’re probably only going to insult the seller and you may never even hear back. If you want to make a low offer and can support it with detailed information about recent sales of other comparable homes you stand a better chance of getting a response and maybe even some ammunition for negotiating. Remember, just because they may have a real estate agent working with them doesn’t mean the listing price is in line with actual value. So, it’s up to you and your agent to do a little homework and get as much information as you can about similar properties so you can spot a true deal.

Another tool that can help you determine the value of a home (or at the very least compare relative values) is to dig into your local property tax data. This is public record and these days most counties have free online property tax searches available on the web. You have to take some of the data with a grain of salt since appraisals and property tax adjustments haven’t been completely in sync with market values, but it can help you compare similar properties in the area. For example, you may see that the house you are looking at has a value $50,000 more than almost identical homes on the same street. Why? Has the property been significantly improved? Is there something different about the lot? Was the house last purchased at the height of the real estate bubble therefore resetting the taxable value and making it look like it’s worth more? The tax data won’t give you explicit answers, but it should point you in the right direction so you know the questions to ask.

4. Price Isn’t the Only Thing Negotiable

We bought a house about a year ago and we were able to negotiate a few thousand dollars worth of electronics and appliances as part of our offer. In the offer we asked the sellers to leave the 50″ plasma TV that was mounted on the wall in the basement, the wired surround sound, a plasma TV in the bedroom, really nice garage shelving, and a $1,500 wine fridge. Did we get everything we asked for? No, but we got most of it. We were left with the 50″ plasma TV, the garage shelves, the surround sound speakers (not the receiver, though), and the wine fridge.

We only made this part of the offer because we did our homework first. We knew these were the original owners and they built the home just a few years ago. We knew how much they financed and built the house for, and learned that one of them received an irresistible job offer halfway across the country and they had to move almost immediately. We also knew they were going to be having a moving sale and wanted to get rid of as much stuff as possible so they wouldn’t have to haul it across the country. So, why not see if we could get them to just leave it in the house for us? Luckily for us, it worked out great.

It’s not just about getting free stuff. A lot of aspects of the offer are negotiable. Things like minor repairs, closing costs real estate agent commissions are all negotiable items as well. Also, don’t forget to mention things that the buyer may want that can help you get a better price. If you’re in a situation where you don’t have to wait to sell your own home before buying this new home, that’s a very attractive proposition for a seller because they know they won’t be waiting for months. Because of this they may gladly come down a few thousand off the price because you’re likely one of the only offers coming in that doesn’t have a home sale contingency.

Making an Informed Offer

As you can see, there are a lot of different opportunities to save money when making an offer on a home. The worst thing you can do is simply go in and make an offer a few thousand less than what they are asking and expect to get a fair price. You still might, but if you do your homework you could find that you’re really not getting that great of a deal or you may miss an opportunity to negotiate even more of a discount. It isn’t an exact science, but the seller wants to get you to pay as much as possible and you want them to sell it for as little as possible. With the right information you can likely find a reasonable middle ground.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Making an Offer on a Home: How to Negotiate a Deal

Record Low Mortgage Rates Make Refinancing Attractive

Mortgage rates continue to fall to almost unheard of levels. We’re talking about 30-year fixed rate mortgages hovering under 5%, and 15-year rates at just 4%. These rates are sharply lower than just a few years ago. But just how much can you save with a lower mortgage rate? Surprisingly, the savings can be quite substantial.

Let’s look at a $200,000 30-year fixed-rate mortgage. At 7% your monthly payment would be about $1,330 a month, less any PMI, escrow, etc. Now, take the same loan at 4.5% and the monthly payment drops to around $1,013. That’s more than $300 less each month. I don’t know about you, but I wouldn’t mind having an extra $300 in my pocket each month. And when you look at the total savings over the life of the loan, the 4.5% rate will save you over $95,000 in interest. It’s no wonder people are looking to buy a house or trying to refinance right now, but is it worth it?

Tighter Lending Limiting Loans

Even though rates are low, it’s more difficult to get a loan or to refinance today. Banks have changed their lending standards and it takes very good credit to get the best rates. A few years ago almost anyone could get a decent rate. If you bought a home with good, but not great credit a few years ago, you may actually find that the rate you can get today is not much better than your current rate. In some cases, you may be unable to get a loan or refinance at all.

There are also new fees being introduced to help lenders deal with risk. New risk-based pricing from Freddie Mac and Fannie Mae adds fees to mortgages based on a borrower’s credit score. In order to avoid the extra fees, borrowers need to have a FICO score of 740 or higher. While a score in the 700s is historically pretty good, you can now find yourself on the hook for added fees even with a 700-something score.

You Need Equity

Bad news for those of you in the more depressed housing markets. In order to refinance you usually need to have some equity in your home. A traditional refinance will allow you to refinance up to 80% of the home’s value. Well, if your $300,000 home you bought a few years ago is only worth $250,000 now and you still owe the bank $225,000 you very well may be out of luck. One exception is the Making Home Affordable plan, which can allow some refinancing on certain loans for certain people to be done without equity, but not everyone will qualify.

Thinking About Points

A lot of people think about paying mortgage points as a bad thing, but that isn’t always the case. The trend has been for lenders to require higher points for rates these days than a few years ago as they are looking for more money up front. Since points are essentially prepaid interest, this puts more money in the bank’s pocket early on. In some cases, paying points can result in a better deal, while some situations may end up costing the borrower money. Generally, the longer you plan on staying in the home, the more attractive it would be to pay points.

Julian Hebron, vice president and mortgage consultant at RPM Mortgage in San Francisco says  that paying points gets borrowers a bigger discount these days:

Historically, one point in fee gets borrower a rate that’s about 0.25% to 0.375% lower. Now one point gets the rate about 0.625% to 0.875% lower.

Recently, you could get a $417,000, 30-year fixed-rate mortgage at a rate of 5.625%, paying zero points. By paying one point (or $4,170) on the same loan, the rate went down to 4.875%, saving the borrower $261 per month in interest cost.

At this monthly savings rate, it takes 16 months to pay back the $4,170 and everything from that point forward is a benefit to you. Traditional breakeven periods are usually double this length of time.

Other Fees and Costs

Aside from paying points and possibly paying a higher rate because of your credit score, you still have all the other costs to contend with. It costs money to prepare a loan, and the underwriting and origination costs can easily be a few hundred dollars. You’ll also need an appraisal, which can again cost a few hundred dollars.

When you factor in all the costs associated with closing on a new mortgage or even a refinance, you can often expect to pay at least 3% of the loan amount in fees. This is especially important when you’re thinking about a refinance as the costs may outweigh the benefit of a lower rate in some cases. When you consider a $200,000 laon may end up costing $5,000  in total to refinance, what’s the breakeven point? If you’re saving $200/month by refinancing, it may take you nearly three years to make it worthwhile financially.

This is an important consideration if you’re unsure just how long you’re going to stay in the home. If the future is uncertain and you may be looking to move in a few years you could end up spending more to refinance than what you actually save. Also, remember that if you’re refinancing for the same loan term you’re resetting the clock. If you had ten years into your existing mortgage and then refinance into another 30-year loan you now have another 30 years before the loan is paid off instead of just 20.

A Lot of Things to Consider

As you can see, just because we keep hearing about how low the mortgage rates are these days, it isn’t always as easy as going to your bank and getting a new loan. With banks limiting these rates to those with the highest credit, regular people with average credit may not be able to find a loan or refinance for anything near what’s being discussed in the news.

In addition, if your future is uncertain and you may need to move in the next few years, the added points  and/or fees required to get the low rate or the fees associated with a refinance may actually cost you more money if you ended up not staying in the house as long as you expected.

So, if you’re considering the purchase of a new home or refinancing your existing mortgage, it’s certainly worth checking around to see what kind of rates you qualify for. But you want to make sure you’re actually going to save money and you’re not just jumping into a decision because the rates are at historically low levels. There are deals to be had out there, but it may be harder to qualify for them, and there may be other strings attached that make the lower rate not as attractive as it seems. Check to see what the latest refinance and mortgage rates are in your area.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Should You Refinance Your Mortgage? Rates Are Low, But It Is Still a Tough Decision

Those who don’t learn from history are bound to repeat it and the real estate bubble will be no exception. While we may learn a lot of tough lessons and create new regulations and put legislation in place that is supposed to minimize the likelihood of something like this happening again, people seem to have short memories. This is especially true when money and greed is often involved.

This current real estate crisis isn’t over yet, but over the next few years things will begin to improve, home values will again begin to appreciate, and many people will be anxious to get back into the market. There will be some things in place that will prevent some of the reckless lending that got a lot of people into trouble in the first place, it won’t stop people from buying a home for the wrong reasons and making the same mistakes that millions made in years prior. So, it’s up to us to know what to do and what not to do when the next real estate bubble takes hold so that we don’t get caught holding the bag.

Housing Costs and Your Budget

The most important consideration when buying a home is obviously the monthly payment. Whether you are renting or paying a mortgage, you need to pay for a place to live. So, all of our attention goes on the monthly payment. In the end, people feel if they can squeeze in the monthly payment into their budget then they can afford to buy the house. This is exactly what got us into the real estate mess to begin with. People and banks ignored many of the old rules of thumb that guided people into an affordable house.

One rule of thumb is that your total housing expenses, including principal, interest, property taxes, and homeowners insurance should not exceed 25-28% of your gross monthly income. The Center for Housing Policy reports that in the last few years the number of working families paying more than 50% of their gross income for housing has jumped by 76%. Spending half of your income just on a place to live is an obvious red flag, but people do it anyway. It isn’t hard to understand why this is such a bad idea. If you’re a two-income household and one of you loses your job your income probably just got cut in half. If you were already spending half of your income on that house payment guess what? Now you’re going to be spending 100% of your income on the payment and certainly you have many other bills yet to pay each month. By keeping your total housing expenses down to the traditional limit of 28% of your gross income or less you will have some cushion in the event of a financial emergency.

The Importance of a Down Payment

Zero-down loans were all the rage during the last real estate bubble. People were anxious to get into new homes and banks were anxious to get money, so the tried and true 80/20 loan got tossed aside. Of course in a market where homes are increasing by 10% or more each year this seems like a perfectly reasonable proposition. Why put your hard-earned cash into the home when you can leverage money from the bank to reap the rewards of appreciating home prices? Obviously, we now know that prices don’t always go up and those who have little or no equity from a down payment got hit the hardest when their home values turned around.

You have to put something down on a new home purchase. Thankfully, many of the zero-down loans are gone, but there are still a few being made. And if it isn’t with no money down, banks are still lending with a little as 3.5% down in many cases. A down payment does two important things. First, the bigger the down payment, the less you have to finance. Obviously, the smaller the loan, the lower the monthly payments and less interest you’ll pay over the life of the loan. Second, it gives you that ever important financial cushion. If you put 20% down and the housing market remains soft for a while and you see no appreciation or even some depreciation in the value of your property and have to sell you aren’t immediately upside down on your loan. The market can drop 5 or 10 percent and you’re still in relatively good shape. If you put little or no money down and the property value falls that much you’re on the hook for a lot of money if you need to sell.

Buy a Home for the Right Reasons

One more thing you can do to ensure you aren’t a victim of the next real estate bubble is to simply buy a home for the right reasons. Home ownership has been pushed as the American Dream for decades, and for many it still is. There’s nothing wrong with that, but people can get caught up in this dream and jump into buying a house long before they are really ready. Buying a home just because you don’t want to rent any more, feel like you’re throwing money away, or because you’re told that’s just what you do when you get married and want to start a family is not how you should approach the decision.

You first have to ask yourself why you want to own a home. Everyone has their own reasons, so you need to decide what makes a home worth it to you. When you know why owning a home is important you can then look for homes in n area and with certain amenities that will fulfill those needs. Second, understand that as much as you might want to buy a house, if you will likely need to move in five years or less then buying a home will usually be a big mistake. It’s often young couples just starting out in their careers that are anxious to get into a home only to find they need to move for their job or one of them finds a better opportunity elsewhere and then they are stuck trying to unload a house that has little equity.

Don’t think of your home as an investment. In the past when real estate continued to appreciate year after year it was easy to get into the mindset that you could buy a home today and sell it for double what you paid in just 10 or 15 years. That was an anomaly and not how things usually work. In fact, even if you look at real estate prices over the past few decades it usually lags the stock market. Your home is a place to live and if you happen to make a profit when you sell you should just consider that a bonus.

Finally, don’t underestimate all of the hidden costs that come with home ownership. It can be exhilarating to finally be free of a landlord, but with that freedom comes many hidden expenses and a lot of work. You’ll be responsible for shoveling your driveway in the winter, mowing the lawn in the summer, paying for all of the utilities, and repairing the household problems that are sure to arise. While these drawbacks usually outweigh the benefits of owning a home, if you don’t take the costs and time it will take out of your weekly schedule seriously it can be physically and financially draining.

Avoiding the Next Real Estate Bubble

As you can see, there are a lot of ways that people get in over their head with their home. You may also notice that some of what I covered are things that the government or new mortgage regulations can’t fix. There may be some changes to what lenders are willing to loan you, but just because you can afford it on paper doesn’t mean it’s something you can really afford, and it certainly doesn’t mean you’re ready to buy a home at this particular stage in your life.

Ultimately, it comes down to common sense:

• Keep housing costs around 25% or less of your gross monthly income. The bank may come in with a higher number, but don’t just take money because they are offering it. Only you know your budget, job stability, and lifestyle that will determine what you can truly afford. By keeping your costs down you have some flexibility so that if there is a sudden change in your income you will have a better chance of making adjustments so you aren’t immediately unable to pay your bills.
• Make a down payment. 20% is the old rule of thumb, but that obviously isn’t doable in all markets. Even if you can’t afford a full 20% you should put down as much as possible. Even though an FHA loan may only require 3.5% down you really need to save even more. The sooner you can put equity into your home the better the chances you can weather a rocky real estate market when it comes time to sell.
• Buy a home for the right reasons. Forget the fact that everyone tells you the American Dream is to own a home or that by renting you’re just throwing money away. If you aren’t ready to buy a home, don’t jump into it too soon. Doing so could put you in a bad financial situation.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Avoid the Next Real Estate Bubble

This is a guest post from MD of Studenomics. A personal finance blog for 20-somethings that want to kill debt, make some cash, and enjoy life. If you like the article, please consider subscribing for free updates.

In the North American society it’s no secret that owning a home has become apart of life. For many years the adage that, “renting is throwing away money,” was rarely challenged. As young people graduated from college and went through their twenties, buying a home simply became apart of life. Well, that is until the recent mortgage and real estate problems. Now the 20-something crowd is starting to challenge the home ownership axiom. Young people are worried about all of the mortgage crisis and all of the recession talk. Now buying a home doesn’t seem like the greatest idea.

Listen, I know I’m just some random blogger dude behind a computer screen. I can’t make the largest (or one of) decisions in life for you. However, I do feel good knowing that I can at least influence your decision or give you something to think about before you sign over the mortgage papers:

How stable is your job?

Buying a piece of real estate won’t completely kill your flexibility, but it will come pretty close to doing so. I don’t like giving financial advice to friends (you know all the legalities and stuff), but when someone asks me about buying a home, I ask the same question: how steady is your current job?

As a 20-something in today’s economy there’s no telling where you could end up tomorrow, a week from now, or a few months from now. Gone are the days of life long jobs and mega corporations never going down. Anything can happen. I don’t want to scare you. I just want you to open your eyes.

Then there’s your side of the stable job equation. How much longer do you see yourself working in the same company? Perhaps you’re sick of the job and are waiting to get out. You could be looking to leave the company and venture out on your own. You could even be looking to do some long term travel in the near future. The options are endless. Just because you have a job today it doesn’t mean that you’ll have one next week.

Key takeaway point: Consider your job stability before you decide on where you’ll establish home base.

How much money do you really have?

How much money do you really have for a mortgage down payment? Okay you have 30 grand. That’s cool, but do you realize how much of that 30 grand will actually go towards your mortgage down payment? Not a whole lot. Once you factor in the cost of a lawyer, real estate agent, moving costs, and relevant property taxes, you’ll realize that your 30 grand didn’t go all that far.

You need to take a realistic lo0k at your financial situation to decide if buying a home is right for you. Many young people don’t like the fact that they have a large lump sum of cash in the bank, so they feel the need to invest in tangible assets. Unfortunately, many home ownership costs are often overlooked and a decision is based without knowing all of the facts. At the very least, check mortgage rates to see how affordable buying a home really is.

Key takeaway point: Don’t assume that all of your savings will go towards the mortgage down payment.

What is the price difference between rent and mortgage?

This is usually the deciding factor for anyone that is on the edge of buying a home. If there’s a minor difference between all home ownerships costs (and I mean ALL) and rent, then the option of buying becomes very attractive. Unfortunately, many potential home-owners only look at the cost of rent and the cost of the monthly mortgage payment. All relevant home ownership costs need to be considered: mortgage, property taxes, maintenance fees, moving costs, potential repair costs, and insurance. Once you have considered all of the proper costs, you make a more educated decision on the largest purchase of your life.

Many of my readers from the Bay Area have made it clear that the difference between renting and buying is astronomically in favor of renting. In my opinion, it really depends on the area you want to live in. Nobody knows about your area better than you do.

Key takeaway point: Keep a close eye on the difference between rent and ownership costs when making your decision.

I hope I’ve provided 20-somethings with some food for thought when it comes to making a decision on home ownership. For further reading on real estate in your twenties check out my 2,00o word post comparing renting to owning a home.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Do You Really Need a Mortgage In Your Twenties?

Fall is upon us and that means cooler weather is setting in. With this colder weather comes higher energy costs when heating your home, additional chores to take care of around the house, and the potential for damage to your home thanks to the weather. So, before the really cold weather arrives you should use this time to do some fall maintenance to ensure your home is ready for the winter. This can not only help you save money by making your home more efficient, but it could also prevent significant and costly damage if a problem goes unnoticed through winter.

Outside Jobs

1. Clean the gutters.

Your gutters are important part in keeping your home in good working order. Did you know that clogged gutters can lead to everything from roof damage to a flooded basement? The gutters should be collecting the water from your roof and safely diverting it down and away from the house. Clogged gutters mean the water will not flow away from the house and will fall right next to your foundation. Heavy rains could then lead to water entering your basement. Even worse, this could pose a significant problem in freezing weather when the water freezes and you end up with heavy ice dams on your roof. The weight and leaking water can also cause significant roof damage.

Cleaning your gutters is as easy as getting a ladder and going up and pulling out all of the junk that has collected in there. A pair of gloves makes this job a little more enjoyable. If you live in an area surrounded by trees you may have significant buildup in the fall as the leaves drop, so you might want to do this chore a few times. And don’t neglect the downspouts. These can also get clogged and they are vital in moving the water away from the house. If you can’t see if they are clogged you can take a small bucket of water up and dump it down the spout and see how fast the water flows out at the bottom. If it doesn’t rush right out there might be some blockage. You can try using a long pole or pipe of some sort to dislodge what’s in there. If you can’t reach it you might want to opt for replacing the downspout. The materials are fairly inexpensive and it’s usually a simple job.

2. Repair driveway and sidewalk cracks.

If you live in an area that experiences temperatures below freezing, then you should look to repair cracks in your cement before the cold sets in. When water gets into these cracks and freezes it expands. This expanding ice can not only make the existing crack worse, but it can create even more cracks and even lift portions of the cement up and make it uneven. You can find various sealers to apply to the cracks at your local hardware store and it’s relatively cheap and easy to apply. Replacing concrete can be costly, so if you can prevent damage and make it last as long as possible you’ll save money in the long run.

3. Inspect your chimney.

If you have a wood stove or fireplace it’s important you inspect and clean your chimney before using it. A clogged or dirty chimney or flue can be extremely dangerous and it could result in dangerous gasses filling up your house to starting a fire. If this is a job you’re not equipped to do on your own it’s well worth the money to pay a professional. Your life and home is far too valuable to skip this annual task.

4. Remove hoses and clutter from your yard.

As the cold weather settles in you’re probably going to be spending less time outside so it’s a good time to start picking up around the yard. If you have hoses, make sure they are drained and properly stored. If left attached and full of water they can freeze and burst, thus requiring you to buy a new hose next spring. You’ll also want to take some time and go around the yard and clean up the fallen debris, but also take some time to retrieve any tools that may have been left behind. Especially if you have kids, you don’t want to let them go play out in the snow only to have them accidentally stumble onto a misplaced rake or other item left hidden under the snow.

Inside Jobs

1. Test smoke alarms and carbon monoxide detectors.

Since the weather will be colder that means you’ll be spending more time with all of the windows closed and possibly even running the heat. That means there is a chance of carbon monoxide buildup. Carbon monoxide is a silent killer so don’t take a chance. A basic detector can be had for as little as $20 and it could save your life. And don’t forget to check the batteries in your smoke alarms. Again, batteries are cheap and it’s a small price to pay when it comes to protecting your family.

2. Clean out the dryer vent.

Did you know that the U.S. Fire Administration estimates that dirty dryer vents are responsible for at least 15,600 home fires each year? Since you’re already checking other areas of your house for fire prevention it’s a good idea to add the dryer vent to your list. Make sure it is free of lint buildup and there are no other obstructions. It is also a good time to make sure your vent is properly sealed where it exits the house. Large gaps around the vent can be a significant area of heat loss.

3. Check and replace furnace filters.

Before firing up the furnace for the first time of the season you should check the filter. Dirty filters are inefficient since air flows less freely. This results in your furnace running longer and using more energy just to keep the house up to the right temperature. You’ll usually have to replace the filters at least twice a year so if you can, see if you can buy filters in bulk or in a multi-pack. This way you’ll not only save money, but you’ll have the filters on hand so that you’re more likely to change them again when they get dirty.

4. Inspect and/or flush the hot water heater.

As time goes by sediment collects in your hot water heater. This sediment forces your water heater to work even harder and could possibly even lead to leaks. If you’ve never drained your heater and have been using it for years you’re way overdue. Generally, it’s as simple as hooking a hose up to the bottom valve and opening it and the water is drained away along with most of the sediment. In addition to eliminating the sediment you might want to consider additional insulation if your water heater is in an unfinished part of the house like a cold basement. They make special insulation to wrap around your heater and you should also insulate the pipes that are attached to the heater to minimize heat loss.

5. Check the remainder of the house for energy leaks.

When was the last time you looked up in your attic? You might want to take a peak up there and see what type of insulation you have. Losing heat through the roof of your house is the number one source of heat loss so having inadequate insulation up there can be costly. Check the R-value and see if that is sufficient for your needs. You can actually look up R-values and see how effective each is for certain climates and usage at energy.gov.

It’s also a good idea to inspect all of your doors and windows for possible leaks. Over time the weatherstripping can wear down and create gaps that is a prime source of heat loss and drafts. Usually a leak can be fixed with just a new piece of stripping or some caulk so it’s an easy and cheap fix that could save a lot of money on your heating bill.

6. Consider a programmable thermostat.

If you’re like most households and aren’t at home all day every day it can make sense to install a programmable thermostat. This allows you to specify the times and temperatures to keep your house at. For example, if nobody is home between 8am and 6pm there’s no need to keep the whole house at 70 degrees. With a programmable thermostat you can tell it to keep the heat off or at least at a much lower temp during those hours and then automatically kick back up right before you get home in the evening. Since your furnace will be running much less with this setup it will pay for the cost of the thermostat in no time.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Fall Maintenance Tips for Your Home That Can Save You Money and Protect Your Family

Home ownership is part of the American Dream and many personal finance pundits insist you need to become a homeowner in order to be financially successful and create wealth. While it’s true that owning a home can be a significant key to building long-term wealth and financial stability, that isn’t always the case. There are many instances where buying a home can actually do more harm than good and could actually put you in an even worse financial situation.

Why do people buy homes? Obviously, there is something to be said about owning the place you live versus just paying rent in return for living there. Beyond that there’s a common belief that over time your home will increase in value which in turn creates wealth. This is the same belief most of us hold regarding the stock market. But as we’ve seen in recent years there are also times when this doesn’t hold true. Just like anything there are good reasons and bad reasons to buy a home.

Why Should You Buy a Home?

There are many good reasons to buy a home:

• Mortgage interest and generally property taxes are tax-deductible.
• The possibility of not paying taxes on the gains when selling a home (up to certain limits).
• Increases your net worth by building equity.
• Possible appreciation in value of the home.
• Freedom to build, design, and fully control the look and feel of your dwelling.
• Interest rates are historically low. Compare mortgage rates.

These are all nice benefits when owning your own home. You can save money on taxes, your mortgage payments build equity (although often slowly) which can in turn be sold for a profit in the future, and you have almost complete freedom in regards to how you want your home, yard or garden to look inside and out. Of course there is a downside to everything, including home ownership.

Why Shouldn’t You Buy a Home?

Even good things have bad counterparts:

• The tax benefits may not be as substantial as you thought.
• Real estate values do not always go up, or increase fast enough to guarantee a profit when you sell.
• If you are young or uncertain where the future will take you, owning a home doesn’t provide the flexibility to move on short notice.
• No more landlord. You are the landlord and when something breaks, you need to fix it yourself or pay to have someone fix it.
• General maintenance can eat up a lot of time and money.

Finding the Balance Between the Pros and Cons

Buying a home is a very big decision. Everyone has a unique situation and just because conventional wisdom leads you to believe you must own a home sooner than later doesn’t mean it is right for you. Take a look at your situation to see if the benefits will outweigh the negative issues.

Ask yourself these questions: Will the tax benefit really have that much of an impact over your standard deduction? Are you certain you will be working in the general area for years to come and won’t have to move? Do you have the time and money to put into maintaining the home? If any of these answers are uncertain you need to really consider whether or not buying right now is the right decision for you.

Some People Say You Can’t Go Wrong Buying a Home

Wrong. You can do great harm to your financial future if you buy a home for the wrong reasons. This is especially true for people who either like to move frequently or have an job situation that may lead to a move within a few years. If something arises that requires you to move from your newly purchased home within the first few years you are looking at the possibility of losing a substantial amount of money, especially in this real estate market.

First, the real estate market is a bit unpredictable which can be seen in real situations recently. If you need to sell a few years after you buy do you think the value has increased enough to be profitable? Even if the value has increased greater than inflation will that amount be enough to cover the thousands of dollars in fees and closing costs associated with selling the home? Also, don’t forget that in some areas a home may take many months if not a year or more to finally sell for the price you’re looking for. If you are pressed for time you may have to substantially reduce the price to get rid of it in a timely fashion.

Second, homeownership simply isn’t for everyone. If you enjoy city life it can be virtually impossible to find affordable housing in or around the city. It some situations may be far more beneficial to rent. For others, they are simply too busy to tend to the issues that come from owning a home. If you have a lawn, it needs to be mowed. If you live in an area that gets snow in the winter your driveway and walkways will need to be cleared. If your water heater breaks you will need to go buy another one and have it installed. Young professionals can find themselves too busy to tend to these issues, and while they require time, more importantly they require additional funds that you don’t have to worry about when you don’t own a home. These types of things alone can account for hundreds or even thousands of dollars a year.

Conclusion

As you can see, just because the talking heads on TV and in most finance books tell you that owning a home is a path to wealth doesn’t mean you should jump into a new home. Don’t feel like you need to rush into buying a home just because all of your friends are or that you feel you need to in order to start building equity instead of throwing away money on rent. Clearly there are benefits to owning a home, but if you make the decision too soon or for the wrong reasons you can find yourself actually doing more harm than good. Stick to the basics and analyze your situation carefully.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Owning a Home Isn’t Necessary for Building Wealth – Make Sure You Buy a Home for the Right Reasons

Preparing for a Move

I don’t know many people who enjoy moving. It usually involves a lot of heavy lifting, cleaning, costly transportation or moving services, and small things to take care of which can lead to a lot of stress. It doesn’t have to be this way and if you spend a little time planning ahead you can save money and take a lot of the stress out of your move.

Fortunately, most of us have a some time to plan for a move since we don’t usually have to pick up and move at the drop of a hat. At the same time, if you’re busy trying to buy or sell a house the thought of moving is probably not the first thing on your mind. But don’t let that stop you from planning. You should really start preparing for your move at least a month or so in advance. Here’s a checklist that can help you start preparing.

One or Two Months Before the Move

Gather important documents. Start rounding up your important documents a month or two before the move. This includes tax returns, insurance documents, financial records, and any other documents you think are important. This will help you accomplish two things. First, you’ll have a list of important companies that you need to submit a change of address to. Not only that, but things can and do get lost in a move and you don’t want your important documents to be one of them. If you gather them ahead of time and keep them somewhere safe they are less likely to get lost in the shuffle on moving day.

Notify the IRS. If you file a change of address form at the post office they will automatically update your records with the IRS. Even so, it’s a good idea to make sure you get things updated properly in case there is a delay or something happens and your address doesn’t get updated. All you have to do is fill out IRS Form 8822 and that will take care of it.

Contact your doctors. If you’re moving out of the area and will be using different medical providers it’s a good idea to let your current doctors know. It’s even better if you already know who your new doctor will be so that they can assist in transferring your records. In any case, you’ll want to make sure they know that you will be leaving and where you will be going. This can make things easier upon going to your new doctor for the first time.

Gather moving supplies. Use this time to start stocking up on moving supplies. Buying boxes can be expensive, so consider checking with friends and family for used boxes or even stop by your local supermarket or other retail store to see if they have any boxes to give you. There’s no need to pay for boxes if you can get them for free.

Start packing. It may seem like a month or two before the move is too early to begin packing things up, but start with items that you know you won’t need. You know what these things are, so if you won’t be using them before the move, get them packed up and ready to go now. The less you have to pack right up to moving day, the easier your job is going to be.

Throw stuff away. As you begin to start packing things up you’re going to encounter a lot of stuff that you just don’t need anymore. This is a good time to start throwing out what you don’t need or create a pile of stuff to donate to Goodwill or the Salvation Army. If you’ve been meaning to declutter your life, a move is your best opportunity. Start fresh in your new house by getting rid of all the excess. Not only is it less stuff to move, but you’ll have less clutter in your new house.

Two Weeks Before Moving Day

Notify utilities. If you’re leaving your old place for good it’s a good idea to give your utility companies a few weeks notice so that you can have your services shut off or taken out of your name at the right time so that you aren’t charged for what you aren’t using. Make sure you check to see who services your new location because it could be as simple as having them transfer service to your new address.

Notify cable and/or internet provider. If you’re like me, being without internet access is not much of an option. So, make sure you plan ahead a few weeks to get service transferred to or set up at your new location. Sometimes they may not have any available appointments for a week or two as it is so it’s best to call early and make sure you can schedule a hookup as soon as possible once you’re into your new house.

File change of address forms. Now that you’re just a few weeks away you should begin filing a change of address with the rest of the places you do business. Make sure to change it with your employer, bank, investment companies, insurance policies, cell phone company, credit cards, and any other place that might send you statements or otherwise need to contact you. While you can set up mail forwarding at the post office, eventually you’ll need to update your address with these companies anyway, so get it out of the way early.

Keep track of moving costs. Did you know that you might be able to deduct some or all of your moving expenses on your taxes? If you qualify you’ll want to keep track of everything. All the boxes, bubble wrap, and tape could be a deduction. Not only that, but so could truck rentals or moving company expenses or even mileage if you use your own vehicles. So, keep track of everything.

Five Days Before Moving

Change address with the post office. With just a few days left before the move it’s time to file your change of address form with the U.S. Postal Service. The easiest way is by stopping at any post office and doing it in person. You can also do it online, but I believe there is a $1.00 processing fee so just keep that in mind.

Finish packing. Don’t wait until moving day to try and box everything up. Start packing the rest of the stuff you won’t need before the move in the days leading up to the move. By now you should have everything but your essentials packed so that come moving day you’re more or less just loading up boxes on to a truck or in a car. When you pack in a rush that is when things get broken or misplaced, so plan ahead and pack at your leisure in the days leading up to the move.

Parting with the neighbors. You’ve probably made friends and met some great neighbors at your old place, but it’s time to say goodbye. Again, you don’t want to surprise the neighborhood on moving day when the moving trucks show up because you’ll spend most of the day talking with neighbors. If your neighbors already know you’re moving, you won’t be spending so much time on moving day catching up with everyone and can focus on getting the job done. Oh, and don’t forget to get the spare keys you may have given out. The new owners may not appreciate half the neighborhood having spare keys to their new house.

Moving Day

Pack smart. Use some common sense when packing and you will save yourself a lot of aggravation and possibly avoid breaking anything. Don’t stuff boxes until they can’t hold any more. You’re sure to break something or have the box come apart during the move. Also pack items by room for easy unloading when you arrive in your new place. You can eliminate extra moving if you have just what you need for that room in the same box. And finally, label your boxes. You just need a marker or ink pen but labeling the box with some of the contents will come in handy.

Get help. If you can, round up some friends or family to help with the move. The more help you have, the less work you ultimately have to do, and the faster you can get everything done. Having help can also eliminate injuries from trying to lift heavy objects yourself. Make sure you show your thanks by taking your help out to dinner or something once the work is done.

Take one last look. As you load everything up on the truck and your old place is empty, be sure to give it one last good look. Check all of the cabinets and make sure nothing has been left behind. Also, it’s a good idea to check for damage that may have occurred during the move. If you’re renting, that could come back to bite you if you have a security deposit. If you’re selling your house, that could cause trouble for the new buyers.

After the Move

Check contents for damage. If you moved yourself and you find damaged items, well, you don’t have anyone to blame but yourself. But if you used a professional moving company, you need to spot the damage and file a claim as soon as possible. So, this might mean unpacking everything in a day or two after the move, but if wait too long you may not be able to file a claim if you do later find something.

Confirm utility hookups. Just because you arrive at your new house and the power is on doesn’t mean you’re all set. There could have been a mixup where the old owners are still on the account at that address and you could be in for a rude awakening in a few weeks when they come and cut the power off unexpectedly. So, take a few minutes to call your electric, gas, trash, cable, or any other utility you use and make sure that they correctly have the new service for that address under your name.

Become familiar with the area. Even if you only moved across town it’s a good idea to scope out the neighborhood and find out where everything is. Where is the closest emergency after hours clinic? Pharmacy? Police station? Grocery store? As you become familiar with your surroundings you’ll be able to save time as you adjust to your new location. And don’t forget to introduce yourself to the neighbors if you haven’t already. They are the ones who will keep a watchful eye out for suspicious activity and may even become good friends.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Moving Made Easy – How to Save Money, Time, and Reduce Stress While Moving

Finding the Best Mortgage Can Save You Thousands

Buying a home is one of the largest purchases you’ll ever make. Because it’s such a large purchase and there is a lot of money at stake it only makes sense to get the best possible financing. After all, most home loans last for decades, so a poor choice up front can end up costing you for years to come. The problem is that not all lenders are created equal, and even trying to compare similar loans can make your head spin. So, let’s take some of the confusion out of shopping for a mortgage and make sure you’re getting the best possible deal.

Most people assume that finding the best interest rate is the most important aspect of finding a loan, but that is only part of the overall picture. Interest rates are very important, but what looks like a good rate on the surface might be overshadowed by excessive costs or unfavorable terms elsewhere in the loan that aren’t immediately apparent. If you know what to look for you can be sure you’re comparing apples to apples. Having just gone through the process of trying to find a loan to buy a house there are a lot of things I noticed over the past few weeks that can help you save money when shopping for a mortgage. Here’s what you need to do to find the best possible home loan.

Check Your Credit

Before you even start shopping around for loans you should first check your credit. If you haven’t already, it’s a good time to use your free annual credit report from annualcreditreport.com. You are entitled to a free credit report from each of the three main credit bureaus each year. The idea here is to make sure your credit report is accurate and if there are any errors, you have enough time to fix them before applying for loans. If you do encounter an error, use this time to call the creditor and see what you can do to get it rectified. In many cases it could be just an honest mistake, but it could also be an indication of something more serious.

You are going to want to check your credit about 30 to 60 days before you begin applying for loans if at all possible. This is because many creditors only update their records once a month, meaning even if you are able to fix an error right away it may still take another month or so before it gets updated on your credit report. It’s easier to wait for an error to be dropped from your report than to go to a lender with a blemished report and then try to explain the situation to them.

It’s also a good idea to get your credit score prior to applying for a loan. Yes, once you apply for a loan you’re going to have your credit pulled by the lender anyway and you will likely get a copy of your score, but a lot of pre-qualifications (not pre-approvals) are done with rough estimates of your income, debt, and estimated credit score without actually pulling your credit. This helps when you’re shopping rates and simply making quick phone calls to various lenders as you can give them an idea right up front as to what your credit score is so they can have a better idea of what you might qualify for. Of course, the score they actually pull once they go through the application will be what is used, but you can make things a little easier by giving them as much information as possible up front.

You won’t get your credit score with your free credit report, so this is something you’re going to have to do separately. Two of the best options for obtaining your credit score are myFICO and Credit Karma. Credit Karma is free and provides some neat features to help you monitor your score and make improvements. I used Credit Karma while we were applying for our mortgage and one thing I did notice was that there was a huge discrepancy between my wife’s score that the banks were obtaining and what Credit Karma was showing. The difference was nearly 100 points. At the same time, Credit Karma was showing my credit score as dead on. So, just keep that in mind. You can get a credit report and credit score from myFICO for around $15 so it’s also not a very steep price to pay if you want to go that route.

Know What You Need and What to Expect

Before shopping for your home loan you should have a good idea of what you need. This means understanding what types of loans are out there and what your specific situation warrants. Do you want a 30-year or 15-year fixed mortgage? Do you qualify for FHA or will you need to seek another type of loan? Do you have 20% to put down to eliminate PMI or will you piggyback your mortgage with a second loan to eliminate PMI? These are all questions you should ask yourself before heading to a lender because if you can tell them exactly what you’re looking for, they can better find what they have available for you. Do your homework ahead of time so that you can narrow your search. If you go to the bank and simply say you want to buy a house for X amount of dollars they might come back and give you a handful of different loan options that may or may not be appropriate for you and it just makes things more confusing for you.

Not only do you need to know what you want, but you should know what to expect in the current market. First, you should check on current interest rates. One of my favorite sites for a quick update is simply bankrate.com. There you can find the average interest rates for a number of loan types. After all, if you don’t know what the going rates are, how will you ever know if the quote you get from the bank is a good one or not? This is also where knowing your credit score can come in handy. For example, if you have a score under 700 it’s safe to assume that you probably won’t be able to get the lowest rate out there. Knowing this, if you see a bank come back with a quote for a very low interest rate it might be a red flag that points to a loan that’s padded with points or other fees that ultimately make it a bad deal for you. So, if you can go into the mortgage shopping process by having some expectations of what you might qualify for and for what rate, you can better determine whether or not your quote is a good deal or not.

Start Shopping Around

Once you’ve determined what you want and know what to expect in the current market, it’s time to start checking with various lenders to see what they can offer. At this stage you should expect to inquire with at least 5-10 different lenders. A lot of people are concerned that this could be detrimental to their credit score because of all the credit inquiries, but don’t worry. Hard inquiries made during the most recent 30 days are not factored into your current credit score. In addition, any inquiries within the 14-day period before that only count as one inquiry. So, as long as you plan ahead and do your loan shopping within a month or so you’ll have no negative impact on your credit score.

To start, you might as well check with the institutions where you currently have your finances. Whether it’s a bank or credit union, existing customers can often get slight discounts. Plus, since you already have a relationship with them it’s easy enough for them to pull a lot of your information and see what you might qualify for. This doesn’t mean you’ll get the best rates, but it’s a good starting point.

After you’ve talked to your current bank you might want to make a few phone calls to other local banks that you might not currently do business with. Banks and credit unions are always looking for new business and will be more than happy to take your call. So, see what kind of rates they can offer and see if it’s worth pursuing.

Finally, thanks to the internet you have a vast number of lenders available at your fingertips. You can look to banks that might not even be in your area or find lenders that otherwise would have gone undiscovered if you stuck to your local yellow pages. Again, this doesn’t always mean you’ll get the best deal with a company you see online, but it can at least be worth a shot. You might also want to look at lendingtree.com for some good comparison shopping.

Assemble Your Documents

After you go through a quick phone call or initial meeting with a lender the next step will be to submit various financial documents that the bank will use to get you pre-qualified. Generally speaking, the bank wants to see verified sources of income, debt obligations, employment history, and so on. To make both your job and the lender’s job easier, you should start getting these documents prepared ahead of time and make multiple copies. If you’re going to be applying with a half dozen lenders you don’t want to rely on one set of originals and have to wait for each bank to get those back to you before applying with another.

Documents typically requested:

• W-2 forms from the past two years.
• Tax returns from the past 1-3 years.
• The last two months of bank statements (both checking and savings accounts).
• The most recent statements for all investment accounts (IRA, brokerage, 401(k), etc.).
• Employment history and current employer contact information.

If you have all of these documents ready to go you’re going to save yourself a lot of time. And the sooner you can present these to the lender, the sooner they can get you pre-approved. The lender will appreciate the fact that you’re prepared and this can help ensure your application gets through the process as fast as possible.

Pre-Qualification vs. Pre-Approval

It is very important to note that during your initial shopping stages you will most likely be doing a pre-qualification and not pre-approval. There is a big difference and both consumers and lenders often mix and match the words. Pre-qualification is simply when a lender asks you for some basic information such as income, debt levels, assets, and estimated credit score to determine if you’ll likely qualify for a loan or not. At this stage nothing is verified, no credit reports are pulled, and the loan officer is simply trying to see if you might be someone they can do business with. Getting pre-qualified does not mean the bank will lend you the money, but it gives you a rough idea of what you might qualify for with that specific lender.

When you get to the process of actually having the lender pull your credit report, submit W-2s, tax returns, verify employment, and fill out all of the disclosures, then you’re looking to get pre-approved. Once you’re pre-approved that means based on the information you’ve provided and subsequently verified by the bank, the lender is willing to lend you the money baring any major changes to your credit or income and the appraisal and title search on the house you wish to buy come up ok. It is at the pre-approval stage where you will receive a good-faith estimate and can tell sellers and real estate agents that you’re a qualified buyer.

Comparing Loans With the Good Faith Estimate

Once you go through the application process if you come back approved, you’ll typically get what’s called a good faith estimate. There is where you’ll begin to see the nuts and bolts of the loan and can hopefully spot what makes one particular lender’s offer better than another. Generally speaking, they must provide this to you within three days of applying for the loan.

The GFE will contain a lot of information regarding the closing or settlement costs. As I mentioned above, getting a good interest rate is important, but even more important can be the closing costs and how the fees are structured. The closing costs are also where a lot of lenders make their money by sticking it to borrowers with inflated or unnecessary fees and then just rolling them into the loan. Your GFE should itemize all of the closing costs, how much you’re being charged, and who is responsible for paying them. Some of the fees you might encounter are:

• Property appraisal
• Credit report
• Lender’s inspection
• Mortgage insurance application
• Assumption
• Mortgage broker fee
• Tax-related service fee
• Application
• Commitment
• Rate lock
• Processing
• Underwriting
• Wire transfer
• Abstract or title search
• Title examination
• Document preparation
• Notary
• Attorney
• Title insurance
• Recording
• City/county tax stamps
• Transfer tax
• Survey
• Pest inspection
• Condominium application
• Prepaid items such as interest, hazard insurance, property taxes, mortgage insurance and flood insurance

If you’ve never purchased a home before this list might scare you. Yes, there are a ton of fees that are involved with buying a home, and as you can see, a lot of opportunities for the bank to make money on your behalf. So, it’s when you get your good faith estimate that you need to scrutinize each quote to see what kind of a deal you’re really getting. Is that 0.25% lower loan such a good idea when it’s padded with excessive fees at closing that ultimately get rolled into the loan? That’s what you need to determine.

As an example, while we were looking over our loan offers last week I was simply shocked to see how different banks are when it comes to some of the fees. For instance, one lender only charged $12 for the credit check while another listed it at $60. One lender had a wire transfer fee of $20 while another had it listed at $125. And even the appraisal itself often came in more than $100 different between lenders. If some of these fees seem out of line, they may be negotiable so it doesn’t hurt to ask.

Finally, keep in mind that the good faith estimate is just that, an estimate. While it should be reasonably close to what you finally expect to pay, things can change.

An Informed Shopper Makes Better Decisions

I hope this has helped you understand some of what is involved with shopping for a mortgage. It can be a time-consuming and tedious process, but the more you know and the more prepared you are, the better off you’ll be. This is a major financial decision in your life so it pays to put in a little work to make sure you’re getting the best deal available to you.  If you know what kind of loan you want, what terms to expect, and know how to spot the features of a low-cost loan you’ll be well on your way to finding the best mortgage.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Shop for the Best Home Loan – Finding the Best Mortgage

Your Home May Be Your Greatest Asset, But It Still Isn’t An Investment

We’ve been taught over the years that the American Dream is owning a home. Not only that, but your home is your greatest asset and can be used to build wealth. Well, that way of thinking has made a lot of people poor. Real estate has made plenty of people wealthy, but it makes even more people poor. Can you make money buying and selling your home? Absolutely. Can you lose money? As we’ve seen in recent years, that’s an even more likely possibility.

The problem isn’t that real estate can increase or decrease in value over time that makes it a poor investment, but it’s the dangerous combination of people using so much leverage and not factoring in other real world factors that even if the value of their home increases they can still stand to lose money. A lot of money.

An Increase in Home Value Does Not Always Equal Profit

Say you purchase a home for $200,000 and sell it ten years later for $300,000. You just made $100,000 or realized a 50% return. That’s a nice profit, right? Not so fast. While this is what most people dream about when purchasing a home it isn’t that simple. Unless you paid for the entire home with cash, somehow had no property taxes, no homeowners insurance, and no maintenance expenses, you did not earn 50% on your property. Let’s run through a typical example to show where the money is really going.

First, when most people purchase a house they have to borrow money. To keep things simple we’ll work with the old standby rule of putting 20% down and financing 80% so we can avoid PMI. Taking that same $200,000 house as mentioned above we’re now going to drop $40,000 down as a down payment and finance $160,000 at an average rate today of about 5.25%. So, let’s look at the typical breakdown of 10 years of payments on a 30-year fixed mortgage in terms of just principal and interest.

These numbers are rounded and are just using some quick averages for simplicity sake, but you can get a general idea of what those 10 years of payments on that $160,000 mortgage look like. Over that time you will have a total outlay of over $100,000, with just under $30,000 going toward the principal and over $75,000 being lost to interest. Just looking at the numbers we can already see that the $100,000 gain in property value is clearly not going to translate into a $100,000 return on your investment.

Here’s a detailed breakdown of the money spent and the actual rate of return based on total money spent:

Here you can see where that money has actually gone. All said and done, when you factor in the down payment plus 10 years worth of mortgage payments, you’ve invested over $146,000 into your home. When you subtract the outstanding mortgage balance with the sale proceeds you’re left with just a $22,684 return. That comes out to only a 15.5% cumulative return over 10 years, or just a percent or two average annual return on your total investment. And you thought savings account and CD rates were bad… Here you just had your home increase in value by 50% in ten years that only nets you a 15.5% real return.

Now Factor in Inflation, Taxes, and More

The above example was just a very basic example using the mortgage payment vs. purchase and sale price. But that isn’t taking into account all the other real world factors when buying a home. There are a few other things that will affect your total return as well: inflation, property taxes, homeowners insurance, realtor commission, and maintenance. First, let’s look at the inflation adjusted final sale price assuming 3% annual inflation over that ten year period.  With 3% inflation, you’d need to sell your home for $268,783 ten years later just to break even with inflation. Since you sold your home for $300,000 you could say that your inflation-adjusted return is merely $31,217. When you factor in your actual return of $22,684 from above you actually lost $8,533!

What about property taxes? When you buy a home, you’re also assuming property taxes as well. Again, for simplicity sake we’ll say that that property taxes average out to about $3,000 annually. Over ten years that’s another $30,000 of money spent on your “investment.” What about homeowners insurance? Again, you need to protect your investment, and at say $800 annually you can figure another $8,000 or so spent over those ten years. That’s nearly $40,000 in expenses that subtract from your profit.

If we look at an inflation adjusted return of -$8,533 and tack on property taxes and insurance you’re looking at a total real return of -$46,533. That isn’t a misprint. You could sell your home for $100,000 more than you paid for it ten years ago and still end up with a loss of nearly $50,000. Some investment.

But What About Tax Deductions?

I’m glad you asked. Mortgage interest is generally tax deductible, you’re right. But for 2009 the standard deduction for a married couple is $11,400. In this example the annual mortgage interest is generally between $7,000-$8,000. A married couple would just barely be on the cusp of using the mortgage interest and property tax deduction vs. standard deduction. Depending on your financial situation and other tax deductions you might still opt for using the standard deduction. Even if you were able to itemize and claim these deductions,  only the deductions above and beyond $11,400 standard deduction would be considered a bonus for owning a home.

Even if by using the interest and property tax deductions gave you an additional $5,000 over the standard deduction that’s only a total tax savings of $1,250 annually at the 25% tax rate. Over ten years that’s just $12,500 which is not nearly enough to offset everything else.

Just the Tip of the Iceberg

The example I used here is just that–an example. There are clearly a number of different variables in play. Depending on how much of a down payment you use, actual rates of inflation, property values, length of time in the home and so on, there are going to be situations where you can actually make money and situations where you lose even more. This is in no way meant to say that buying a home is a bad idea, but it’s merely an exercise to help you look at the whole picture and not get caught up in the idea that even if your home increases in value that you’re going to walk away with some money.

Some will argue that much of this is moot simply because even if you didn’t buy a house you’d still be paying money to rent a place, so even if you can build some equity over time and may get a tax deduction that it’s still a better long-term alternative than renting. That’s a valid argument, but this wasn’t meant to be an argument of renting vs. buying. Instead, it just tries to shed some light on the notion that even though your can seemingly sell your home for much more than your original purchase price, you really might not be making as much money as you think.

Bottom line is that you home is a place to live. If you buy a home with that in mind and enjoy where you live it doesn’t matter if you make money or lose money. Above all else, your home provides shelter and enjoyment. If you can find a way to make money when you sell it, that’s great. But as long as you keep in mind that your home is not much of an investment in most cases, you can keep things in perspective and spare yourself some disappointment.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Your Home is Not an Investment – Don’t Treat It Like One

New Site Allows You to See if You May Qualify

You may have heard about the Making Home Affordable (MHA) plan that’s part of the greater financial stimulus efforts, but what is it all about exactly? Well, the idea is to help homeowners refinance or modify their loans when in the past they may not have qualified for such assistance. If you’ve ever considered refinancing your mortgage in the past, you may have found out that you typically needed to have 20% or more of equity in your home or more in order to refinance. Unfortunately, with the sharp decline in home values across the nation, there is a good possibility that even responsible homeowners who put 20% down on a new home just a few years ago could now be in a situation where they don’t have the required equity to refinance.

The MHA plan has changed all of that. Through June 2010, borrowers with loans that are owned or guaranteed by Fannie or Freddie may be able to get quick refinances for up to 105% of a home’s value. They must be current on their mortgage payments, but administration officials estimate that as many as 5 million homeowners qualify. And refinancing is available for borrowers with credit scores as low as 620.

Why a Refinance May Make Sense

Part of the fallout in this economy has been mortgage rates. Rates have fallen sharply in the past year and are sitting at near record lows. 30-year fixed rate mortgages are now averaging under 5% and if you have good credit you may even be able to snag a 15-year mortgage with a rate close to 4.5%. In many cases, this could be 2% less than what you were able to get on the same mortgage just a few years ago.

To understand what that could mean for your monthly payment, a 30-year fixed rate mortgage of $150,000 at 7% compared to the same mortgage at 5% is nearly a $200 difference each month. What could you do with an extra $200 each month?

Why a Refinance May Not Make Sense

So, if you can get a lower rate and save good money on your monthly mortgage payment it’s a no-brainer, right? Not exactly. In most cases, a refinance isn’t free. You’re creating a new loan, and most of the time this means there will be fees. Without shopping around it’s hard to tell how much you’ll pay in fees, but in some cases it can be a few thousand dollars. This is an important consideration if you’re not planning on staying in your house for much longer. You have to factor in the length of time it will take to remain in the home in order to offset the fees. If you don’t stay in your home long enough it’s possible the refinance could actually cost you more money than it saves. You also have to be careful with paying points and everything else to make sure you’re really getting the savings you’re looking for.

How to See if You Qualify for a Refinance or Loan Modification Online

Assuming you want to consider a refi and aren’t sure if you qualify under the new MHA guidelines, how can you find out more? The good news is that in most cases you can do this from the comfort of your computer. The first step would be the government’s Making Home Affordable website. The site is free, safe, and simple to use to see if you qualify for a refinance or a loan modification. I went through their questionaire with our information and I was pleased to discover that it was accurate.

There’s also another site that’s sponsored by myFICO that’s completely free and will also check your eligibility and it’s called Mortgage Relief Online. The main difference here is that at the end of the questions you have the option to provide your contact information so that a qualified counselor can contact you to help walk you through your options. I also used this site and it too guided me to the correct information and I didn’t even have to provide my contact information if I didn’t want to. But that may be a nice option for those who are looking to talk to someone and get some advice.

But these tools can only do so much. One of the major requirements to qualify for the MHA benefit is that your loan has to be owned or guaranteed by Fannie Mae or Freddie Mac. Since your loan is likely serviced through a bank or mortgage company, how can you tell if your loan is associated with Fannie or Freddie? In the past, you’d likely have to call your lender and have them provide the information. Now, you can check online or by calling an 800 number. If you walk through the sites listed above, you’ll get to the lookup pages anyway, but if you want to check it out yourself, here’s how to do it:

Fannie Mae

• 1-800-7FANNIE (8am to 8pm EST)
• www.fanniemae.com/loanlookup

Freddie Mac

• 1-800-FREDDIE (8am to 8pm EST)
• www.freddiemac.com/mymortgage

I knew our mortgage was guaranteed by Fannie Mae so I went ahead and tried both of these forms to see how accurate they were. The Fannie Mae tool did in fact say they had our mortgage on record, and the Freddie Mac tool said they did not have it. So, again the tools seemed accurate. Of course, there are still situations where there could be a misspelling or outdated info that could make your results turn up incorrect, but this is a good starting point.

If you’re wondering if you might qualify for refinancing, these are good tools to get you started. I know that finding time to call the bank or dealing with some customer service people can be frustrating, so this can hopefully save you some time initially. Once you find out if you qualify, you can then go directly to your lender with all of the information needed to refinance and save some time.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Find Out if You Qualify for a Mortgage Refinance Under New Making Home Affordable Plan