Financial Expert Suze Orman
Home values have shot up more than 50 percent in many areas since 2000. If you were lucky enough to own a home already, you're now happily sitting on some nice equity. But many of you who currently rent are probably feeling a ton of pressure to jump into home-owning ASAP. Do that, and you could be in for a fall. Because even if a home of your own is the single best investment you may ever make, you need to handle your funds intelligently. Doing so requires understanding today's tricky marketplace.

If you buy a house and don't intend to move for 10 or 20 years, I'm confident you'll make a nice profit. But what if you dive into the market with the goal of selling or refinancing in just a few years? My friends, you may be in for a big shocker. Real estate has done so well for so long that it's natural for it to take a breather. I'm not saying the market is going to tank, but it may not grow at the 15 percent annual clip everyone seems to expect. Be careful if you're considering condos or townhouses. Their appreciation rates are often not as strong as single-family homes. And don't rely on an interest-only loan or a no-down-payment loan. It's best to put down at least 10 percent so you have a cushion. If you can't refinance your interest-only loan in a few years because you haven't built up equity, you'll get hit with some painful payment hikes. And if you rely on a no-down-payment loan and values take a temporary dip and you need or want to move, you could be forced to sell at a loss. If an interest-only loan is the only way you think you can afford a home, then the hard truth is that you're not ready to buy. And be realistic: Envision your home appreciating at an average annual rate of 4 percent, not 20. If you can live with that modest gain, go for it. When you do invest wisely, you're in for the following long-term benefits:  
  • The interest you pay on your mortgage is tax deductible. If you are in the 28 percent tax bracket, every dollar you pay in interest is reduced to just 72 cents after the tax break.
  • When you sell your home, the first $250,000 of your gain is absolutely tax-free. If you're married and file a joint return, the gift is $500,000. You can use this break for any primary residence you have owned and lived in for at least two of the past five years. Any gain above these limits is taxed at the superlow capital gains rate, which is just 15 percent for most people.
  • When your heirs take possession of the house, the IRS will allow them to claim as their acquisition cost the value of the home on the day you die. That can help to greatly reduce their tax bill when they decide to sell.
  • If you manage to get your mortgage paid off before you retire, you'll eliminate your single biggest monthly living expense.

NEXT STORY

Comment

LONG FORM
ONE WORD