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That may be the question. The answer is both personal and financial.
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If you're planning to buy a home, you probably have good reasons
for your decision. It may be that you share the feeling that owning your own home
is a key part of the American dream. But there are also financial issues involved
in buying real estate that you need to consider as well.
From one perspective, a home is an investment, maybe the single largest one you'll ever make.
Like certain other investments, real estate has the potential to increase in value
over the years, so that you can sell it for more than you paid.
But unlike investing in stocks,
bonds,
variable annuities, and
mutual funds, which you buy as a way to achieve your financial goals, most people consider owning a home as an end in itself.
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FAMILY GIFTS
If
your parents or grandparents are willing to help you out with buying a home, each
of them can give you a tax-exempt
gift of up to $15,000 a year. It's a case where a timely gift may make a lot more sense than an inheritance.
Be careful, though. Gifts over the limit may be taxable for the giver. And loans from family members earn
imputed interest
if the lender doesn't charge you any - or enough - to borrow. That means he or she has to pay income tax on
the interest that normally
would be paid even though you didn't pay it. One exception occurs when a parent's loan enables a child
with no investment income to buy a home.
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HOW BUYING WORKS There are usually three distinct phases
in buying a home: accumulating the down payment, finding a mortgage, and building
your equity.
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1.
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Generally you need a down payment of at least 10% and sometimes
as much as 20% of the purchase price available in cash in order to buy. But you
can investigate some federal and state programs, like those run by the Federal Housing
Administration (FHA), the Department of Veterans Affairs (VA), and certain community groups, which require
much smaller down payments. You can also check the website of the US Department of Housing and Urban Development
at www.hud.gov.
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2.
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When you have enough for a down payment, you can begin looking
for a home and a mortgage loan.
That's a long-term loan that provides the money you need to buy the home. You pay the loan back, usually in
monthly installments over a 10- to 30-year period.
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3.
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When you've arranged your mortgage and bought your home,
you gradually build your equity, or ownership, by paying off the interest and principal
of your loan. In most cases your monthly payment will also include enough to cover
the real estate taxes and insurance on the property. Those costs are sometimes referred
to as PITI, or principal, interest, taxes, and insurance.
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WHAT IF YOU'RE TURNED DOWN?
If you're turned down, ask why. Find out which credit reporting company the
lender used to check on your credit history and request a copy of that history from
the company. It should be free of charge since you've been turned down. If there
are any obvious errors, follow the instructions on the report to have them corrected
and check up to see that the changes have been made. If the negative information
is correct, and your credit history has flaws, at least you'll know the factors
that may be blocking your application and can begin to strengthen your credit credentials.
Sometimes you can make out better applying to a bank or credit union you already
have a relationship with or using a mortgage broker who specializes in finding interested
lenders. The broker will charge a fee, so you'll want to be sure that cost is
necessary. You might check out online mortgage sources. And, you might consider
a private arrangement with sellers who would be willing to finance the purchase
- although you don't want to do that without the advice of a real estate lawyer
you trust.
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