Golden Rules of Home Buying

Nov. 1, 2011— -- Quick! How much do homes typically appreciate per year? If you answered "7 percent," then you have plenty of company but you're also wrong.

Real estate website Zillow.com conducted a survey and 42 percent of respondents thought homes went up in value 7 percent a year. Doh! The real answer is 2 to 5 percent a year -- in normal times -- and these are not normal times.

Real estate values overall have actually declined for five straight years. If you'd like to test your knowledge some more, check out Zillow's Home Buying "IQ Quiz" here.

I'm not actually hear to browbeat you if you got the answer wrong. Rather, I've got one word of caution and one of encouragement.

Caution: If you're not planning to stay in a house at least five to seven years, don't buy because you need some time for the house to appreciate and at least cover your closing costs.

Encouragement: If you are planning to settle down, then the fact that prices have declined a lot is a grand opportunity for you.

I believe in the power of home ownership, as long as it's done right, which means getting back to basics: put 20 percent down and stay for a nice chunk of time. Do it this way and here are some of the fringe benefits home ownership brings:

Make money with somebody else's money: The best part of buying a house is, what other investment enables you to use somebody else's money to make money? That's exactly what happens when your house appreciates in value and you sell it for a profit.

Even though you still owe money on your mortgage, the people at the mortgage company don't make you share the proceeds with them, now do they? What a deal. And to make this profit, you don't have to overhear a brilliant stock tip or try to comprehend bond rates. All you have to do is pay your mortgage.

Take in the tax benefits: Don't forget that home ownership comes with lucrative tax benefits. The first benefit starts the moment you move in. The IRS allows you to deduct the interest you pay on your mortgage from your federal income taxes.

It's the government's way of supporting home ownership. Here's another tax treat, courtesy of Uncle Sam. If you make money on a business or a bond, you have to pay capital gains taxes on the profit. But if you sell your house at a profit, the gain is tax free up to $250,000 for individuals and $500,000 for couples.

Most mortgages don't go up: By buying a house, you are locking in your monthly housing payment. By contrast, rent is almost guaranteed to go up. Since 1990, rents have risen more than 3 percent a year, according to Reis Inc., a real estate forecasting firm. If you buy a house and choose a 30-year, fixed-rate mortgage, your housing payment is set for decades.

Even an adjustable rate mortgage payment can stay steady for up to 10 years. By buying instead of renting, you are beating inflation at its own game by guaranteeing your payment.

With perks like this, I say, take a gamble on a possible gain. What's the worst that could happen? You might lose money on a house? Well, if you keep paying rent, you will definitely lose money.

Go for the potential earnings instead of the sure loss. Just don't expect your new house to go up 7 percent a year.