Your Money_ The Missing Manual Part 16

$1,500.

6.50%.

$2,840.

$2,180.

$1,865.

$1,690.

$1,583.

7.00%.

$2,905.

$2,248.

$1,940.

$1,768.

$1,665.

7.50%.

$2,968.

$2,318.

$2,015.

$1,848.

$1,750.

8.00%.

$3,035.

$2,390.

$2,093.

$1,930.

$1,835.

8.50%.

$3,100.

$2,463.

$2,170.

$2,015.

$1,923.

The table shows roughly how much you'd pay every month on a $250,000 mortgage (including princ.i.p.al and interest). For example, if you took out a 30-year loan at 6% interest, your payment would be about $1,500. But if you shopped around and found a 5.5% rate, you'd pay $1,420, saving $80 every month for 30 years. A difference like that really adds up over time.

TipVertex42.com offers a free Excel spreadsheet that lets you calculate approximate home-owners.h.i.+p expenses, including your mortgage, taxes, and insurance, but also maintenance and improvements. Download it here: http://tinyurl.com/home-calc.

The type of mortgage you take out will depend on your goals and your financial situation. Most people opt for a mortgage with a fixed 15- or 30-year term. Here's some info that can help you decide which is best for you: - Interest rates on 15-year mortgages are lower than those on 30-year loans, but because the loan is only half as long, your monthly payments are higher. (See the table above to compare monthly payments.) If you can keep saving for retirement and other goals despite the higher monthly payments, a 15-year-loan is a great option because it'll save you a bundle in interest. But if it's going to crimp your cash flow, go with a 30-year mortgage instead.

- For most people, a 30-year, fixed-rate mortgage is the best choice. The monthly payments are lower than with a 15-year loan, and you have greater flexibility. If you want to pay more than the minimum amount every month, you can (see Should you prepay your mortgage? Should you prepay your mortgage?), but you don't have to. This gives you a kind of safety net: If you lose your job, say, it's easier to make the payments on a 30-year loan than a 15-year loan.

NoteBe wary of mortgage products like adjustable-rate and interest-only loans. These may seem attractive, but there are a lot of pitfalls involved. These types of loans are for "sophisticated" borrowers. (If you're not sure whether you're a sophisticated borrower, you're not.) Closing the Deal As you wait for the lender to approve your loan doc.u.ments, there are a lot of other things to think about. Your top priority should be checking the background of the home you're about to buy. Your lender will require that the house be appraised, but you should go further. Once your offer is accepted: - Ask the seller to pull a CLUE report (http://tinyurl.com/clue-rpt). The Comprehensive Loss Underwriting Exchange is a database the insurance industry uses to track insurance claims connected to people and property. A CLUE report tells you what sorts of claims were filed at the address during the past 7 years. You can't order this report yourself-only the person who owns the property can.

- Get an independent inspection. A good inspection will cost several hundred dollars, but it's worth every penny. Ask friends, family, and coworkers to recommend inspectors. Don't use an inspector recommended by the seller, broker, or real-estate agent; you want somebody who's thorough and tough, and whose livelihood isn't tied to others in the process. Tag along during the inspection and ask questions. (You may want to film the house at this time.) Don't panic if the inspector finds problems; instead, use them to negotiate.

- Talk to the neighbors. Ask about the house and the neighborhood. The seller may be reluctant to spill the beans on the garage conversion he did without a permit, but the old guy next door probably won't be.

- Stay on top of things. The home-buying process involves a lot of people, and they're usually juggling lots of other deals, too. Don't be afraid to be the squeaky wheel that needs a little grease. Your questions may drive people crazy, but that's okay. What's worse: To annoy the t.i.tle-insurance company or to lose tens of thousands of dollars because you were too chicken to speak up?

- Do a final walk-through. On the day before you close the sale, ask to take one final pa.s.s through the house. Are the window treatments there? Are the light fixtures still the same? Have requested repairs been made? Your goal here isn't to do another home inspection or to find things to negotiate on, just to be sure everything's in the same condition as when you made the offer.TipDon't finance your closing costs into the mortgage. It might seem like a good idea, but it means you'll pay twice as much for them in the long run.

- Ask to read the mortgage paperwork before before closing. (Closing is when you sit down and finalize the deal by signing all the necessary paperwork.) This is the most important item in this list. You're likely to sign more than 100 pages filled with legal gibberish-do you really want to read it for the first time at closing? What happens if you discover there's a penalty for prepaying the mortgage? Or that the contract specifies a term of 15 years instead of 30 years? If you don't read the contract, you have n.o.body to blame but yourself if something goes wrong. If you need to, have a lawyer review the paperwork. This is likely to be the biggest legal contract you ever sign, so take the time to get it right. closing. (Closing is when you sit down and finalize the deal by signing all the necessary paperwork.) This is the most important item in this list. You're likely to sign more than 100 pages filled with legal gibberish-do you really want to read it for the first time at closing? What happens if you discover there's a penalty for prepaying the mortgage? Or that the contract specifies a term of 15 years instead of 30 years? If you don't read the contract, you have n.o.body to blame but yourself if something goes wrong. If you need to, have a lawyer review the paperwork. This is likely to be the biggest legal contract you ever sign, so take the time to get it right.

TipIf you don't already have a lawyer, consider hiring a real-estate attorney to review your mortgage paperwork. It'll cost you a few hundred bucks, but that's peanuts compared to the hundreds of thousands you're spending on your home. Besides, during this process, your lawyer will be the only other person actually in your corner representing your best interests.

Owning a Home After all that research and hard work, you've finally got yourself a home-congratulations! Of course, your responsibilities don't end there.

When you rent a place to live, your only cost is the monthly rent payment (and maybe utilities). But when you own a home, the costs never seem to end. In addition to monthly mortgage payments, you have to pay property taxes, homeowners insurance, utilities, maintenance and repairs, redecorating, landscaping, and more.

Let's look at two of the most important expenses: maintenance and repairs and paying the mortgage.

TipFor a look at the true cost of owning a home, read Cameron Huddleston's account at Kiplinger.com: http://tinyurl.com/homecost.

Saving Money through Regular Maintenance Your house is like a living, breathing organism. As much as you try to keep things in working order, eventually something goes wrong-and usually at the worst possible time. Like that Christmas morning my wife and I woke to find our water heater had broken, flooding one end of the house. Happy holidays!

Just as daily exercise and a sensible diet keep your body healthy and help you avoid costly medical bills, regular home maintenance keeps normal wear-and-tear from developing into problems, and problems from turning into emergencies.

As a rule of thumb, every year you should set aside about 1% of your home's purchase price for maintenance and repairs. So if you bought a $300,000 home, figure about $3,000 for annual upkeep. Of course, this is just a guideline-some years you'll spend much more, and some years you'll spend nothing at all.

When we bought our new house in 2004, the home inspector told us that for every dollar we spent on maintenance, we'd avoid roughly $100 in future repairs. He wrote in his inspection report, "In my experience as a professional home inspector, I have looked at hundreds of homes in all age ranges, and I have seen thousands of dollars of damage to homes that could have been avoided by spending $5 to $10 and just a few minutes of work."

If you make a point of doing as much maintenance as possible yourself, you'll save money and develop confidence and know-how. It can be intimidating at first, but with time, you can learn how to do most common household repairs. Here are some things I've learned over 15 years of playing handyman: - Don't panic. Stay calm and relaxed when making repairs. Rash actions can turn a small problem into a disaster.

- Act quickly. Take care of problems as soon as possible. I once put off repairing a leaky roof. Can you guess how that turned out during a rainy Oregon winter?

- Use a reference. Sh.e.l.ling out 20 bucks for a book like the Reader's Digest Complete Do-It-Yourself Manual Reader's Digest Complete Do-It-Yourself Manual (2005) can save you thousands of dollars over the years. And the Internet is a great place to find answers to common home maintenance questions, including downloadable videos and PDFs; just make sure to get your info from reputable websites. (2005) can save you thousands of dollars over the years. And the Internet is a great place to find answers to common home maintenance questions, including downloadable videos and PDFs; just make sure to get your info from reputable websites.

- Work methodically. Be orderly. Follow instructions. Measure twice, cut once. When you take something apart, neatly set the pieces someplace safe (and label them if you don't think you'll be able to remember where they went). If you have a digital camera handy, take pictures of how things are a.s.sembled before you dismantle them.

- Don't make a.s.sumptions. Some of the most frustrating-and dangerous-do-it-yourself experiences happen when you a.s.sume things. For example, don't a.s.sume the power is off before you replace a light fixture; test the wires before you touch them. Don't a.s.sume a pipe is a certain diameter; measure it before you drive to the hardware store.

- Pay attention. You can never tell what piece of information might be important, so as you work, notice details. Are the electrical outlets you're replacing two p.r.o.nged or three p.r.o.nged? How big were the screws on that gizmo, anyhow?

- Be safe. Some tasks are dangerous, and things like electricity and chainsaws can kill you. Which brings us to the next item in this list.

- Know when to call an expert. Many nuisances around the home can be solved with patience, research, and elbow grease; don't be intimidated by replacing a light fixture or a garbage disposal. But be willing to call in a specialist for dangerous or complicated projects.

TipIf you're interested in improving your DIY skills, take cla.s.ses from your local community college or attend seminars at a home-improvement store.

Because routine maintenance is so vital, it can be helpful to draw up a checklist of annual ch.o.r.es. Here's one from the Mississippi State University Extension Service: http://tinyurl.com/MS-homelist. The National Center for Healthy Housing has a good list, too: http://tinyurl.com/NCHH-homelist. And for you old-school Internet fans, check out the Big List of Home Maintenance Tasks from alt.home.repair: http://tinyurl.com/USENET-homelist.

On The Money: The Pros and Cons of Home-Equity LoansOne of the advantages of owning your home is that you can use the equity you build to meet other financial goals. Normally, this equity remains untapped, growing slowly with time. But there are a couple of ways to use your home's equity for other purposes: - A home-equity loan (or HEL) is a second mortgage that generally has a fixed interest rate and a term of 10 to 15 years. Basically, it lets you borrow money from your bank using your home's equity as collateral.

- A home-equity line of credit (or HELOC) is also a second mortgage, but takes the form of a revolving credit account, much like a department store credit card. With one of these, you can borrow money repeatedly as long as you don't exceed the HELOC's upper limit. These loans generally have variable interest rates and a 10-year term.

Traditionally, people have used HELs and HELOCs to pay for home improvements, like remodels and additions. But you could also use them to pay medical bills, send the kids to college, or even pay off credit cards. (The recent credit crisis has put a damper on these sorts of loans; falling home values and stricter lending standards mean it's tougher to take out a second mortgage.)Using home equity to pay off debt can be an appealing option: The interest rates on HELs and HELOCs are much lower than those on credit cards. And if you've got balances on several credit cards, it's likely that your combined card payments are higher than the single payment on a home-equity loan would be. Plus, in most cases, interest on a home-equity loan is tax deductible, just like mortgage interest.Still, home-equity loans aren't magical cure-alls; they don't eliminate debt-they just s.h.i.+ft it around. If you don't change the habits that led you into debt in the first place, you could end up in worse shape in the long run. And there are serious risks that come along with using home equity to pay down credit card debt: If something goes wrong, you could lose your house!For more about how to tap your home's equity wisely, see http://tinyurl.com/MSN-equity.

Making Mortgage Payments Paying a mortgage is just like paying any other debt-except there's a lot more riding on it. If you don't pay your car loan, all you lose is a way to get around. But if you don't pay your mortgage, you could lose your home. So make it a priority to pay your mortgage on time and in full every month.

As you're making payments, there are a couple of things to keep in mind. First, you should get rid of private mortgage insurance as soon as possible. Second, decide whether accelerating your mortgage payments make sense for you. The next two sections have the details.

Private Mortgage Insurance Lenders require private mortgage insurance (PMI) from homebuyers who take out loans for more than 80% of a property's value. So if you buy a house with a down payment of less than 20%, you'll probably have to carry PMI.

NoteIf you can't afford a 20% down payment, you may be able to bypa.s.s PMI by taking out a second mortgage when you buy the house. This second loan-commonly called a piggyback loan piggyback loan-usually takes the form of a home-equity loan or a home-equity line of credit (see the box on Making Mortgage Payments Making Mortgage Payments).