Lessons in Home Ownership
By: Jeff Brown

After all the recent hand wringing, things are looking up for prospective home buyers.
Mortgage rates have stopped the alarming run-up of recent weeks and are heading back down. The housing market seems to be stabilizing.

It’s too soon to call the crisis over, but not too soon to draw some lessons from the past few years that could help reduce the risks if you’re shopping for a new home now.

Here’s a checklist:

A home is a home, not a piggy bank. Over the long run, home ownership pays off because your housing cost gradually becomes smaller in relation to your net worth and income. The home equity you build can be tapped for living expenses when you’re older.

But many people who thought home-price gains were a sure bet have been badly burned, finding they owe more than their homes are worth. If you buy a new home and its value does rise, avoid the temptation to take out one home equity loan after another, especially to use money for short-term needs like vacations and paying off credit card bills.

Don’t buy more than you need. Frugality is hip these days, so you don’t need a McMansion to show off. By purchasing a more modest home you will free up money for other purposes, like college costs or retirement.

A good rule of thumb: any room that’s not used every day is a waste; don’t buy it.

With your mortgage, keep it simple. The standard 30-year fixed-rate loan is the best deal right now, averaging 5.582 percent, according to the BankingMyWay.com survey.

Most of the exotic, high-risk adjustable-rate loans that got people into trouble aren’t offered any longer, but you can still find a few, like interest-only loans. Those are for savvy, disciplined borrowers who can afford to gamble.

Many lenders offer loans that beat the average. J.P. Morgan Chase (Stock Quote: JPM), for example, has a 30-year fixed loan at 5.25 percent, while Wells Fargo (Stock Quote: WFC) has one at 5.375 percent. Use the Mortgage Loan Calculator to figure payments.

Think long term. Home values have not necessarily hit bottom, and even if they have you can’t count on large appreciation to quickly offset the fees and commissions paid when you buy and sell. If you’re not planning to stay put for six or seven years at least, think about staying where you are or renting.

Prepare a back-up plan. What if you or our spouse lose a job or want to move for a better one? Will you be able to handle your mortgage payments and other costs with a reduced income? Could you afford two homes if you must move and can’t sell the old one? If you won’t have a margin for error, buying a new home may not be a good move.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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