Buying a home raises a lot of questions. We know because we answer those questions every day. Through the years, we've found that some basic questions turn up again and again. Yet different buyers have different needs and a constantly changing marketplace raises new questions.

Our goal is to help you get straight answers to your specific questions. To make it easier for you, we've put our experience into this handbook. You'll find answers to basic and difficult questions. You'll also find we've grouped our know-how into three parts: Getting Started, House Hunting and Buying.

In the next pages, you'll develop your own "road map" to finding the home that best suits your needs. Once you're finished reading, you'll probably have even more questions. That's when a professional real estate agent will begin to guide you personally through the homebuyer's maze and answer your specific questions as they come up.

From experience, we know there is no substitute for the knowledge of a professional agent. After all, homebuying is an adventure to be enjoyed and an agent can make your home search easier and faster. We look forward to working with you.

You benefit from an agent's services in many ways, such as:

• helping you set up a plan of action through an analysis of your needs and your finances, the current housing market, homes available in your price range and lenders' mortgage options.
• guiding you through the intricacies of making an offer on a home and presenting your offer to the seller.
• assisting you through both the pre-settlement and settlement processes.

What do people mean when they say home ownership is the key to financial security?

The benefits of home ownership are both financial and psychological:

• Home ownership is a durable (real) investment. Historically, housing has appreciated in value for decades. Although no one can say a specific home in a specific location will increase in value, generally speaking the odds favor most homeowners. Also, monthly mortgage payments (the part that reduces the principal loan) becomes a solid form of savings.
• Numerous unique tax advantages are available to homeowners. Unlike other investment tax shelters, home ownership works for you even as you live in your investment. For example, the thousands of dollars you pay in mortgage interest (discussed below) is deductible. This tax deduction alone can sometimes make owning your home cheaper than renting with "after tax" take-home dollars.
• By accumulating equity in your home, you can later "move up" to another home, with a good down payment on hand.
• Home ownership offers you the opportunity to take control of your housing costs. Mortgage payments (even on adjustable-rate mortgages) are more predictable than rent.
• Owning your own home allows great freedom of choice in choosing your community, architecture, interior decor, appliance selection--plus whatever method of financing best suits your situation.

What are some of the tax advantages of owning a home?
Tax breaks enter the home ownership picture from all angles: buying, owning and selling. Remember, tax laws are constantly changing and complex, and you should consult with your professional tax advisor before filing any claims on your tax returns. Here are the basics as of this writing:

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Tax savings begin with deductions allowed for:

• Settlement charges for the use of money, such as "points." (A point is a sum equal to one percent of your loan amount. Points are charged to increase a lender's yield and attract money into the housing market. For example, one point on an $86,000 loan is $860; two points total $1,720.)
• Prepaid interest on prorated loan payments made between settlement and your first mortgage payment.
• City, town and/or county real estate taxes on the purchased property.

Home Ownership

Your home provides shelter for both you and your taxes. For example:

• The interest paid on your loan is deductible, as are your property taxes. This interest detection is also a major tax advantage in owning a second home for yourself.
• You may deduct a portion of your home expenses if you have a qualifying home office.
• Many health-related additions to your home required by your doctor (such as air conditioning for an asthma sufferer) are deductible, provided the addition does not add to the value of your home.
• Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductible, subject to income limits.

Home Selling

When you sell your home, tax savings help defray many of the expenses of selling, such as:

• "Fix-up" expenses incurred in repairing you home for sale may be deducted, as long as the repairs have been made within 90 days of the sales contract date, are paid for within 30 days of closing and are not capital improvements (such as a new roof).
• If, when you sell, you have to pay a penalty for prepaying your mortgage, that charge can be deducted. Fortunately, few mortgages have prepayment penalties today.
• Under certain conditions, you may deduct moving expenses, within limits.
• If, within two years of selling, you buy a new home of equal or greater value, you can defer payment of any tax on the sale of your old home.
• When that deferred tax comes due, you can subtract the cost of home improvements from your net sale price ("net sale price" is your sale price minus closing costs and broker's and lawyer's fees). You can also subtract title insurance fees, recording fees, transfer taxes and other acquisition costs. This reduces your gain, and also your taxes.
• If you're 55 or older and have lived in your home for 3 of the past 5 years, you do not have to pay taxes on gains up to $125,000.
• If you pass up the one-time $125,000 gain exclusion and if you do not re-invest in a new home when you sell, you can spread out your profit by permitting the buyer to spread purchase payments over a period of years, thereby reducing your taxes in any one year.

Is it true my paycheck will get bigger when I buy a home?

Yes, if you're renting now or if your mortgage interest payments are higher than what you pay now. Buying a home adds to your "take home" paycheck because you can increase your withholding allowances in anticipation of mortgage interest payment deductions on your next tax return. By increasing your allowances, you reduce the amount withheld to pay future taxes--which puts your tax refund in your paycheck today, not at the end of the year. Ask your tax preparer to estimate how many allowances you should claim to compensate for reduced taxes caused by the interest deductions.

What price home can I afford to buy?

The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for your down payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and as an emergency reserve.) The harder answer is how much you are qualified to borrow.

For starters, you can put the most frequently-used lender's rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mortgage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sale price).

The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance (P.I.T.I.) and condominium fees, if any. For example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per month payment.

The 36% limit covers both your P.I.T.I. and long-term debts (more than 10 months) such as alimony, regular household expenses (mortgage insurance and/or condominium or association fees), outstanding loans (car, appliances, school) and/or support for children (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment per month.

In our examples, the affordable loan payments for an income of $3,600 per month are a range between $1,008 per month home payment and $1,296 per month combined home and debt payments. (Strict lenders may use only the 28% standard, even with no debts, or ask you to meet both standards.)

In addition to your loan, the cash you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment (ranging from 0 to 5 to 10 to 20% or more of the sale price), closing costs, moving expenses, possible immediate repairs, remodeling and new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.

An agent can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford.

Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget. Different mortgage plans can dramatically affect your monthly payment--and thus the price home you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards--again, allowing you more home for your income.

Today's financing techniques can be confusing. What are the basic types of loans I should know about?

Here is a brief run-down of four major mortgage plans.

Fixed-Rate Conventional Mortgage - A conventional loan is a loan made to a buyer without a third-party participant, such as VA or FHA. Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15, 20 or 30 years. The interest rate stays the same for the life of the loan; therefore, the monthly principal and interest payment remains constant. Shorter terms mean somewhat higher monthly payments. Shorter terms also mean more rapid equity growth, mortgage pay-off and dramatic savings on total interest payments.

Terms of a conventional loan vary among lenders, but many can be obtained with as little as a 5 to 10% down payment. When the down payment is less than 20%, it is necessary to obtain Private Mortgage Insurance (PMI) to protect the lender from a buyer's default.

• Advantage: Quick processing and stable payments.

Adjustable-Rate Mortgage (ARM; also "Variable Rate") - The interest rate may go up or down over the years and is tied to a financial market index (such as one-year Treasury bills). Monthly payments may also be adjusted on a periodic schedule. Most ARMs set a maximum adjustment (or "cap") on possible increases to interest rates, monthly payments and/or a maximum cap on rates for the life of the loan.

• Advantage: The lower initial interest rate and monthly payment allows the buyer to pay less in the early years for a larger loan and helps buyers qualify for a more expensive house than with a fixed-rate loan. Caps offer peace-of-mind rate ceilings.

FHA Loan - Strictly speaking, FHA does not make loans; rather it insures loans, which increases lenders' willingness to make low down payment loans.

With an FHA-insusred loan, a homebuyer can make a small down payment, a feature particularly attractive to first-time buyers. The down payment can be as low as 2.25%, depending on the size of the loan. Second mortgages are permitted within specific guidelines.

Points (prepaid interest) can be charged by the lender. The purchaser may negotiate the interest rate and points with the seller. FHA buyers of single-family homes can finance 100% of closing costs.

FHA charges an advance Mortgage Insurance Premium (MIP) fee, as well as a monthly charge for all loans. Ask an agent how much the fee would be in your situation, and if you can borrow some of the fee and add it to the loan rather than measurably increasing your closing costs. FHA-insured mortgages offer a maximum loan amount that varies from area to area.

• Advantage: Low down payment, low interest rates, long terms, many are fully assumable loans, no prepayment penalty and a second mortgage is permitted under certain circumstances.

VA Loan - Qualified veterans can take out loans up to a specific limit with no down payment. These limits occasionally change; check with an agent for current rules. VA-guaranteed loans can be combined with second mortgages and are fully assumable by any qualified buyer. Rates and points may be negotiated with the lender. VA/FHA qualification guidelines are more flexible than those for conventional loans. Actual income qualifications are dependent on the type of loan requested.

• Advantage: usually no down payment; points can be paid only by the seller, although the buyer is charged a loan origination fee (tax deductible); no prepayment penalty and assumption may make your home very attractive to buyers when you decide to sell.

How much down payment should I make?

There are advantages to both large and small down payments, and which you choose depends on both personal choice and your financial circumstances.

Advantages of a large down payment: Less mortgage to pay off, smaller monthly mortgage payments and greater opportunity to find lower interest rates. Advantages of a small down payment: Less cash out of hand, therefore, more money for other costs and a larger monthly mortgage payment means a larger tax deduction for mortgage interest.

With an FHA loan or less than a 20% down payment on a conventional loan, you will be required by the lender to take out mortgage insurance. The FHA calls it MIP, while private companies call it PMI.

What are the best sources of cash for a down payment?

If your own bank account isn't large enough, you have several options. For example:

• Receive a tax-free gift from your parents (or others) documented by a "gift letter" stating no repayment is required (thus your debt burden is not increased). Some lenders may require you to use some of your own money in addition to the gift.
• Borrow against a life insurance policy.
• Borrow against a company pension plan.
• Cash in a retirement savings plan (even though you may have to pay a penalty for early withdrawal).
• Ask for a cash payment from your employer instead of next year's raise.
• Obtain an advance on a future inheritance.
• Use your own business as collateral.
• Team up with friends, relatives or investors as partners in return for equity in your home. (You can, if you like, buy them out later.)

Should I shop for a loan before or after I find a place to buy?

It's a good idea to let an agent help you look for financing before you find a home. The agent is in constant contact with many lenders and can act as an invaluable "clearing house" of information. If you're actively house hunting but have not found the right home yet, ask the lender to do a "screening application." This details your income, debts and assets.

Knowing where you stand concerning how much money a lender will lend you (based on your income and credit rating) puts you in a good bargaining position. Sellers faced by deciding between two buyers--one who is "pre-screened" by a lender--may favor the offer from the buyer for whom getting a loan is almost a sure thing.

On Your Mark. Get Set. Go!

Now that you've mapped out your strategy, determined what you want to look for in general and lined up a real estate agent, you'll want to discover all you need to know about intelligent, time-saving and money-saving house hunting. That's what our House Hunting Strategies section is all about.