(MONEY Magazine) – THE STOCK MARKET'S STUCK IN THE BASEMENT. NO WONDER HOME IS WHERE OUR HEARTS (AND WALLETS) ARE THESE DAYS. WE'RE POURING MORE AND MORE OF OUR NET WORTH INTO HOUSING--AND TAKING MORE AND MORE OUT, THROUGH MULTIPLE REFINANCINGS AND HOME-EQUITY LOANS. AS OUR HOME VALUES SOAR, SO TOO DO THE RISKS, AS DOES THE NUMBER OF QUESTIONS ABOUT OUR NO.1 ASSET. HERE ARE 23 OF THE MOST FREQUENTLY ASKED.

When you think about it, residential real estate should be dull stuff. Unlike with stocks, there's no ticker symbol, no IPOs, no fortunes made or lost overnight. No 24-hour cable networks, no larger-than-life CEOs, no earnings surprises. No market tumult to leave investors elated or bedraggled at 4 p.m. No Jim Cramer.

And yet, the American home seems to have eclipsed the stock market over the past few years as a generator of wealth and excitement; it also continues to buttress a faltering overall economy. The upward price trends have been relentless and extraordinary, allowing millions of homeowners to tap into their expanding equity through loans or refinancing. The figures bear repeating: gains of 10% to 15% annually in many regional markets, and jumps of 20% or more in some East Coast and West Coast cities.

Much of this boom comes from demand spurred by record-low interest rates, looser credit rules, demographic trends and high employment. But it's hard to talk with any economist these days without also puzzling over what other forces could be keeping home prices aloft in the midst of such uncertain times. We seem to have arrived in uncharted economic territory--and that raises more than a few questions. Has the housing market gone from being hot to rampantly speculative? Why is the word bubble on everybody's lips? What'll the coming year bring in various markets around the country? And above all, is it a dangerous time to buy or sell a home? In the following pages we look at these questions and others, covering everything from your concerns about refinancing to the moves you might want to make right now.

AM I NUTS TO BUY A HOME IN THIS REAL ESTATE MARKET?

It's easy to look at the woes of the stock market and conclude that residential real estate will be the next economic domino to fall. But such thinking ignores some obvious differences between stocks and homes. High transaction costs (agent fees, mortgages, title searches and other mystery services) create big barriers to speculating in the housing market. And since homes provide living quarters for their owners, there's little likelihood of panic selling. The upshot is that residential real estate is virtually bubbleproof. Average home prices have yet to post a year-over-year decline in the 30 years the federal government has been tracking them and, according to Freddie Mac chief economist Frank Nothaft, the last significant decline in average U.S. home prices occurred during the deflationary era of the Great Depression.

While we wouldn't rule out declines in some overheated markets (see our exclusive forecast on page 122), we don't think you're nuts to be buying. In fact, postponing a purchase is more likely to cost you money than save you money. Regional crashes--Houston in the late 1980s, Boston in the early '90s--have been so few and far between that the odds of a home buyer successfully timing the market are incredibly long. Historically, home prices rise steadily even in areas with declining populations and sputtering economies: In Buffalo, for instance, median prices have nearly doubled since 1984, and in 1999, the single worst year for Buffalo real estate, median prices declined by all of 3%.

Moreover, the correlation between stock prices and real estate isn't as strong as many believe. Recent gains in U.S. housing prices--6.5% over the past year alone--are a fraction of those achieved by stocks at the height of the bubble. Not only that, the single best real estate market of the past 30 years occurred when stock prices were trending lower. In the late 1970s, home prices rose at annual rates as high as 15%, notes Lyle Gramley, a former Federal Reserve governor who's now an analyst for Schwab Washington Research. Even after controlling for inflation, home prices were rising faster than they are today. And in the years following the '70s boom, prices continued to climb at a modest rate, even as housing starts plunged 50%.

The fundamentals of housing are also much healthier than those of pre-crash stocks. At the height of the tech bubble, the Nasdaq composite traded at an amazing 145 times earnings--10 times what was probably appropriate. In a real housing bubble, you'd expect to see comparable signs of excess in the form of speculative home building and a glut of new inventory. Today, however, the inventory of unsold homes is unusually low--4.5 months' worth of supply vs. a 20-year average of 7.5 months. The point is, if you're ready to buy a home, there's no time like the present. Our cover couple, Los Angeles deejay Christopher Lawrence and his wife Sara, got the right advice last summer when they were wrestling with whether to buy their first home--an English-style cottage in L.A.'s historic Miracle Mile district. Sara was pregnant with their first child, but friends kept warning them they'd be buying at the top of the market. "Our agent said, 'Look at where you are in your life--you're having a baby,'" recalls Sara from the $633,000 two-bedroom they bought in August. "It doesn't matter what the market's like--there'll be drops, but over the long term it's only going to go up. It's all about your needs."

SHOULD I SELL NOW WHILE THE MARKET IS HOT AND RENT UNTIL THINGS COOL OFF?

No. If you're not put off by the odds against timing the market, at least consider the costs you'd incur by selling. There's the 5% (or more) commission for a real estate agent; on a $300,000 house, that's a $15,000 cut. Then you should factor in lost tax savings. If you had a $250,000 mortgage on that $300,000 house, the tax deduction on mortgage interest was saving you $4,300 a year, assuming a 30% bracket.

You'll need a mortgage once you decide it's time to buy another home--figure on $2,500 in closing costs, maybe more in pricier places to close, like Florida, New York and Texas. Then there's the possibility that interest rates won't be so appetizing by the time you decide to jump back in. On a $250,000 30-year mortgage, the difference between rates of 5.75% and 8% works out to about $4,500 a year.

Add it all together and the fixed costs associated with selling that $300,000 home today, renting for two years, then purchasing a new home in 2005 would be $22,000, assuming 30-year rates stay at 5.75%, and $26,500 should rates climb back to 8%. In other words, home prices must decline at least 10% for this gambit to pay off. It could happen: Median home prices fell 20% in Houston in the late '80s, and 10% in New York City in the early '90s. However, regional declines of 10% or more are so rare--and the hassles associated with moving so great--that it seems foolish to wager on your community becoming the next Houston.

HOW DOES MY HOME FIT INTO MY INVESTMENT PORTFOLIO?

Actually, it doesn't. Sure, a home is an investment whose value can grow significantly, but its primary purpose is shelter, and that fact makes it difficult if not impossible for owners to manage homes the way they would other assets. "I tell my clients that if they want to look at their home like any other investment, they need to be willing to sell to rebalance their portfolios," deadpans Jon Duncan, a financial planner in Tacoma, Wash. "Not too many are."

The other problem with treating a home like any other investment is the impact this might have on your stock and mutual fund selections. For example, if you believe two-thirds of your "portfolio" is already invested in real estate (i.e., your home), you might shy away from housing-related stocks and bonds. Big mistake, given the attractive valuations of home builders and the juicy yields offered by real estate investment trusts (see page 127 for our picks in these and other areas of the housing economy). Better to view your home as a financial safety net than as a stock or bond or mutual fund.

WHICH IS THE BETTER BUY, A SMALL HOUSE IN A WEALTHY TOWN OR A LARGE HOUSE IN A LESS DESIRABLE PLACE?

Most real estate brokers will tell you that the home in the well-to-do neighborhood is the wiser move, and the latest available statistics seem to back up this thinking. In relatively ritzy Orange County, Calif., for instance, median home prices climbed 87% between 1984 and 2001, according to real estate tracker Local Market Monitor. Compare that to Riverside County, Orange County's more middle-class neighbor, where median home prices appreciated 64% during those 17 years.

Of course, you could buy the bigger house for now and relocate to the more affluent community in a few years once you're earning more or your kids reach school age. Keep in mind, however, that there are financial risks to such a plan. Phyllis Radding, a real estate agent in affluent Larchmont, N.Y., tells clients to buy their first homes in the communities where they intend to ultimately settle. That way, when it comes time to upgrade to a larger house, they can be reasonably assured that their equity has kept pace with local property values--something not necessarily true of a house in a less desirable town five to 10 miles away.

IS THIS A GOOD TIME TO BUY A VACATION HOME?

As with primary residences, the odds are stacked against anyone trying to time the vacation-home market, which is why now is as good a time as any to buy. Massachusetts agent Paul Grover notes that in the 22 years he's been selling vacation homes on Cape Cod, there was only one brief stretch when average prices actually declined: "It was in the early 1990s, and it was only by 5% or 10%."

We understand why some people are convinced that the rapidly rising second-home market is due for a fall. Beach houses, ski chalets and country retreats are perceived as luxury goods, and the market for luxury goods is notoriously cyclical. But what makes vacation homes different from, say, a Mercedes or a Rolex is the fact that real estate is also an investment. And even though the stock market's collapse has left consumers with far less money to spend on luxuries, demand for vacation homes has held up because those same investors are allocating more of their net worth to real estate. Over the past five years, prices in high-end markets like Cape Cod and West Palm Beach have doubled, and many of today's buyers have concluded that vacation homes will continue to outperform stocks and bonds.

It's a smart bet, says Clark Thompson, CEO of the website EscapeHomes.com. The number of Americans reaching retirement age will increase 73% by 2011, and at least 40% of these retirees are expected to relocate--many to resort-type communities. In the next five years alone, baby boomers will add an estimated $100 billion in sales to the vacation-home market. "And in the wake of Sept. 11," adds Thompson, "people are reconsidering where they want to travel--overseas vs. something more local. Suddenly that place on the lake an hour away looks a whole lot more appealing."

If you do decide to buy a weekend getaway, here's a financial angle to consider: Interest rates on second-home mortgages are typically 1.5 percentage points higher than those on primary residences. (Default rates on second-home mortgages are higher.) See if you can get the cash to buy that second home by taking out a bigger mortgage on your first home.

HOW DO I KNOW WHEN IT'S WORTHWHILE TO REFINANCE?

Balance your potential savings on monthly payments with your refinancing costs. A couple who borrowed $175,000 six years ago at 6.63% today owe about $162,000 on the loan. Refinancing that balance with a 5.75% loan will save them about $175 a month, according to the online calculator at Bankrate.com. Assuming they pay typical closing costs of $3,000 to $5,000, it'll take 17 to 28 months for the savings to make it into their pockets.

Ah, if only it were really that simple. Would-be refinancers also must consider how far they are into their current mortgage. If that couple refinances with another 30-year mortgage, they'll be paying for their home for 36 years. What's more, because of the way mortgages work, refinancing could add substantially to the amount of interest they pay. In the beginning of a mortgage, most of the monthly payment goes to the bank as interest, with a very tiny amount applied to the principal balance. Over the years, that balance shifts, so that by the end of the 30 years, nearly all the payment goes to principal. When you refinance, you start over paying mostly interest.

Let's return to the couple with the six-year-old mortgage. Over the life of that loan, they'll pay $228,604 in interest. Refinancing to a 5.75% mortgage will cut total interest paid to $178,339. Sounds good, but wait: The couple already has paid more than $68,000 in interest in the first six years of their existing loan, cutting their total remaining interest to $160,586. Refinancing, then, will cost them $17,753 in interest on top of the initial closing costs. So in reality it will take this couple nearly 10 years to start saving money on the refinancing.

Our couple can still make refinancing work if they plow some of their monthly payment savings back into the new mortgage. Paying an extra $95 a month shortens the refinanced mortgage back to the original payoff date, and chops the total interest paid to $136,363, because the extra money goes straight to the principal. Of course, this move reduces the amount the couple saves on monthly payments to just $80, which increases the amount of time they'll need to recoup their closing costs to at least 37 months. But if they plan on staying in the home, this still represents a good deal.

Family needs add wrinkles too. Miami financial planner Linda Lubitz advises clients who are nearing retirement and plan on downsizing to refinance their existing balances to five-year or seven-year adjustable-rate mortgages, which bear interest rates about a percentage point less than standard 30-year loans. Although they'll be paying lots of upfront interest again, the real goal is to lower the monthly payment as much as possible and bank the savings. "And if they're planning to sell in five years," Lubitz adds, "then they'll pay off their mortgage and not have to worry about the adjustable part."

If big expenses like college tuition are around the corner, you could try pulling extra dough out of your home in what's called a cash-out refinancing. Here, you refinance for more than you actually owe on your loan and pocket the difference. This can work better than a homeequity loan, because mortgage rates are lower than home-equity rates. Warning: If your new loan amount would top 80% of your home's value, this option isn't all that good an idea, because you'd be forced to pay costly private mortgage insurance.

WITH RATES SO LOW, DOES AN ADJUSTABLE-RATE MORTGAGE REALLY MAKE MUCH SENSE?

It's hard to imagine a better deal right now than the good old 30-year mortgage. It locks in low payments and makes household budgeting easier. Most homeowners, however, don't stay put even close to three decades--in fact, half of all homeowners move within 8.2 years, according to the U.S. Census. That half might be better off taking an adjustable-rate mortgage (ARM), which offers very low rates for an initial period (say, three or five years) and then adjusts rates after that based on a market index.

Consider a couple borrowing $200,000. They'll pay $1,167 a month for a 30-year mortgage at the current low rate of 5.75%. Let's say they're pretty confident they'll move within five years for a job transfer or because they'll have started a family and require a bigger house. Their monthly payment on a five-year ARM (interest rate: 4.75%) comes in $124 lower, at $1,043. Over the five years, that's a savings of $7,440. On top of that, with the ARM they'll have paid down an additional $2,500 in principal at the end of the five years.

The risk, of course, is that our couple ends up staying in the house longer than planned. Most ARMs, after the initial fixed-rate period, adjust every year on the anniversary of the mortgage. Although lenders typically cap annual increases at two percentage points (with lifetime caps on increases as well), your rate--and your monthly payment--can soar quickly. Depending on market rates, if you stayed in the home any longer than a year after the initial fixed-rate period expired, you'd want to refinance.

WHERE CAN I SAVE MONEY ON MY CLOSING COSTS?

If you're refinancing, first call your existing lender and ask if it offers what's called a streamlined refinance. This is your lender's way of trying to keep your business, assuming you've got a good payment record and aren't trying to take extra cash out. A streamlined refi will usually save you at least the cost of a credit report and an appraisal (and probably get your loan done faster, because it requires less paperwork). Union Planters Mortgage, for instance, tells customers a streamlined refinance will save them between $500 and $1,000. Don't let the lower closing costs blind you to other factors, however. You may still be better off with another lender if the interest rates are too high at yours. And if you do decide to go with a different lender, you may be able to save on appraisal, survey and title-search costs if your original loan was made within the past six months.

With any new mortgage, shop around. Compare good-faith estimates from at least three lenders. Question every item. Listen carefully for charges that sound duplicative. Fees such as the credit report, appraisal and lender's title insurance aren't negotiable because they're charged by third parties. Origination fees, processing, underwriting and wire-transfer fees might be. Remember: Using a mortgage broker means an extra charge, which might be worth it if the broker locates a great rate.

Unfortunately, it's a lender's market right now. Mortgage makers are so swamped with business they aren't inclined to bargain. But you can bolster your position. Arm yourself with info on average fees charged by 103 lenders nationwide from Bank Rate Monitor's survey, provided on its website. None other than Doug Duncan, chief economist of the Mortgage Bankers Association, says he saved $2,000 on his refi last year by making a spreadsheet to help him evaluate costs. He called and re-called his three potential lenders, working them against each other. "The power of the market will work for you," he says. "You just have to be diligent."

HOW CAN I CONVERT THE EQUITY IN MY HOME INTO INCOME DURING RETIREMENT?

The most obvious way is to sell your home, buy a smaller, less costly abode and invest the difference, ideally in dividend-paying stocks. Downsizing works even more effectively if you move to a town with smaller property tax bills or a region with a lower cost of living.

If you're determined to stay in your home, and your other income sources fall short of your budget, consider a reverse mortgage, which lets you borrow against your home and not pay back the debt as long as you live there. Interest piles up over the life of the loan (because you're not making payments), and the total amount must be paid when you die, sell your home or move away. Bronwyn Belling, head of AARP's Reverse Mortgage Project, says retirees are increasingly using reverse mortgages to cut their monthly bills by eliminating their remaining mortgage payments.

This may sound like easy money, but be careful. These loans are more costly than traditional mortgages because there are monthly servicing fees as well as required insurance to protect the lender against a drop in your home's value. In addition, unless your home appreciates at a good clip, repaying a reverse mortgage may leave little or no equity for your heirs.

The first step to deciding whether a reverse mortgage is for you is to bone up on the subject. An excellent AARP guide is available at www.aarp.org/revmort or by calling 800-424-3410 and requesting publication No. D15601.

Here are the basics. Borrowers must be over 62. The amount you can borrow depends on your age, the value of your home and the interest rate. You can take the money as a lump sum, regular monthly loan advances or (most commonly) a credit line that's used only when you need it. Best bet: the federally insured Home Equity Conversion Mortgage, available through 150 lenders, which tends to have lower closing costs than other types. Go with a lender with expertise in this complicated product, such as Financial Freedom, a unit of Lehman Brothers (888-738-3773), or Wells Fargo Mortgage (800-336-7359). Before signing, says Belling, "do your homework and explore all the alternatives."

WHAT'S THE BEST WAY TO LEAVE MY HOME TO MY HEIRS?

Even estate-planning pros aren't fully sure what to tell clients following 2001's gradual repeal of the federal estate tax. Right now, both gifts and estates worth more than $1 million ($2 million for couples) are subject to a marginal tax rate of 50%. (Your estate includes your property and your retirement funds, investments and life insurance.) The lifetime gift-tax exemption will remain $1 million in the coming decade, but the tax break on estates will gradually rise to $1.5 million by 2004 and to $3.5 million by 2009 (double for couples). In 2010 there'll be no tax on estates and a 35% top tax rate on gifts. Then, in 2011, the 2001 law ends and the tax break on both estates and gifts is scheduled to return to $1 million.

Since, uh, you don't know the year you're going to die, it's hard to determine if your estate will be subject to tax. In coming years, Congress may repeal the estate tax permanently. Or it may not. Meanwhile, folks who want to avoid taxes will hire attorneys and financial planners to create qualified personal residence trusts (or qprts, as they're often called in the estate-planning biz) and other legal vehicles that use the tax code to discount the value of the estate.

One of the less complex ways to pass on your home is to "gift" the house directly to your kids using a long-term family loan. Basically, you set up your own mortgage and sell them the house, charging at least the minimum interest rate required by the IRS (currently 2.8% to 4.3%, depending on the terms of the loan). But instead of the kids dipping into their own accounts each month to repay this loan, you give them the dough as a gift. (Current law allows each spouse to give $11,000 every year to each child or grandchild without it counting against the $1 million lifetime gift-tax exemption.) You also can include a provision forgiving the loan if you die before it's repaid; the balance would then be counted as part of your estate.

There's one slight drawback to all this: Portions of the kids' repayments on the family loan are considered taxable income by the IRS. Your taxable income. We wouldn't try this alone at home. Work with an estate-planning pro.

SHOULD I USE MY EXTRA CASH TO PREPAY MY MORTGAGE?

All other things being equal, paying your mortgage off early would be wise--few things in life are more satisfying than finally owning your house free and clear. But all things are not equal under the tax code, and consequently, paying off your mortgage now could limit your financial options down the road.

Say you've paid off your mortgage early but suddenly need some of that equity to pay for a boat or a grandchild's tuition. You could get a new mortgage, but the law says the interest on that new mortgage is not tax deductible since the original mortgage on the house has already been paid off. You could still deduct interest on a home-equity loan up to $100,000, but the rates are higher. "It's something people should think about before they pay off a house," says Ernst & Young accountant Evan Snapper.

If you have revolving-credit debt, definitely pay that off first. Your typical credit card charges 13% interest these days, while prevailing mortgage rates range from 4.25% to 6.25%.

Investing the cash might make more sense. If you have a 5.75% mortgage and are in the 30% tax bracket, the "real" rate you're paying is only 4% after you factor in the value of the mortgage interest deduction. Any number of investments would be good bets to produce better than 4% after-tax returns. (See "Game Plan" on page 84 for suggestions.) Even in the 15% tax bracket, your real (or after-deduction) rate is 4.9%. If you think you can do better than that, particularly in an IRA or other tax-deferred account, you're better off investing the money, not prepaying the debt.

SHOULD I RENOVATE OR BUY A BIGGER AND BETTER HOUSE?

If the only thing standing between you and your dream home is an extra bathroom or an ultramodern kitchen, you may want to think seriously about remodeling. Not only is a home improvement an investment you can enjoy, but it's usually cheaper than moving: according to the Bureau of Economic Analysis, the cost of buying a new home has escalated an average of 3.7% annually since 1994 (often double or triple that in some markets), while the cost of remodeling has gone up just 2.8%. Plus, there are intangible benefits, like your kids staying in their school district. "People are often more willing to overspend on renovations than leave their community," says economist Gopal Ahluwalia of the National Association of Home Builders.

That said, a major renovation--installing an entirely new electrical system, say, or adding more than one room--can be a drain on your patience as well as your resources. Extensive renovations generally take six months to a year. Then there's the stress of finding and negotiating with an architect and contractor and getting your plans approved by local government agencies. Says Los Angeles real estate broker Cindy Chew: "You have to be pretty laid back to handle all that."

WHICH HOME IMPROVEMENTS WILL ADD THE MOST TO MY HOME'S RESALE VALUE?

Real estate professionals and financial advisers agree that making home improvements solely to increase your home's resale value is rarely a good idea, because getting your money back is not a sure thing. But some home improvements are indeed savvier than others.

For starters, upgrading your home's basic infrastructure is almost always a sound bet. Sure, installing a larger water heater or a new roof, windows or air-conditioning system isn't terribly sexy, but a prospective buyer will likely adjust the offering price to make those necessary alterations if you haven't already done them. After buying a country house a few years ago, New York City interior designer Sheila Bridges immediately added a second well out back and a fireplace to the living room. "It obviously adds value," she says, "because people buying country homes expect this stuff."

Next, buyers most consistently want the bathrooms and kitchen remodeled. The average U.S. homeowner recoups 70% to 80% of these costs after one year, reports Remodeling magazine, and returns tend to be even higher in pricier areas, even if the costs are more. In San Francisco, for instance, sellers can expect to get back more than 130% of their investment in a bathroom or kitchen after one year.

Don't overdo it, though. Buyers won't match you dollar for dollar for your marble floors, but they may pay full price (and sometimes more) for something clean, simple and efficient. Use neutral colors for bathroom tiles and don't stray too far from classic styles when buying fixtures. Same goes for the kitchen: Go with white cabinetry rather than something zoomy. "Restrain yourself as much as possible," says Bridges, whose clients range from former President Bill Clinton to software designer Peter Norton and rap mogul Sean "P. Diddy" Combs. "Save unique tastes for furniture or for less important rooms of the house," Bridges adds. Or let loose on commercial appliances. "Words like Viking and Sub-Zero go a long way on real estate listings." Other good bets include renovating your basement and adding a family room or bedroom. Dicier moves: building a home office, remodeling children's bedrooms or installing a home gym or swimming pool.

Finally, don't overspend. Putting a $50,000 kitchen filled with state-of-the-art appliances into a $150,000 home probably isn't a great idea. You may choose to do it anyway, especially if you plan to live in the house for the next 20 years, but don't expect to recoup your investment. Someone looking to buy a house in a $150,000 neighborhood won't dish out another $50,000 because you souped up the kitchen.

WHICH REMODELING RECEIPTS SHOULD I KEEP FOR TAXES?

The right improvements can increase your home's cost basis, thus decreasing your taxable gains, which is especially important for sellers whose profit exceeds the $250,000 tax break ($500,000 for couples) on capital gains from the sale of a primary residence. But first, the improvements must meet this key IRS definition: that they "add to the value of your home, prolong its useful life, or adapt it to new uses." Obviously there's much room for interpretation here. Some general rules:

Improvements must be permanently attached to the house or property. A new roof, heating system, repaved driveway, upgraded electrical wiring all qualify. So do additions, like a new bedroom, deck or garage. Furnishings don't count, since they're not attached, although built-in appliances do. An above-ground pool may or may not be considered an improvement, depending on how it's installed.

Mere repairs may not pass muster. The IRS describes repairs as things that "maintain your home in good condition but do not add to its value or prolong its life"--painting (interior or exterior), resanding floors or replacing broken windows. But many tax experts insist it's not black and white, so it's worth saving any receipts you think might qualify. Example: You may be able to add the cost of repairs (like plastering and painting) if they were done as part of a major remodeling of your home.

Files for your home improvement expenses should be kept separate from your other tax receipts. You must keep your home improvement files for three years after the tax return due date for the year in which you sold the property--and the sale could take place many years after the seven-year storage requirement for tax returns. Also, keep your original purchasing agreement, which includes buyers' expenses like title-search fees and attorneys' fees. They weren't deductible when you purchased your home--but now can finally be added to your cost basis when you sell it.

IS THERE ANY WAY TO GET AROUND THOSE 5% REAL ESTATE AGENT COMMISSIONS?

Nobody likes paying 5% or 6% commissions to real estate agents, but there's a reason why 95% of sellers still use agents. Going "fizzbo" (for sale by owner) doesn't always save money. Skilled agents can pay for themselves by helping you make your home more marketable. Also, the almighty multiple-listing service (MLS) can reach more buyers in a day than most do-it-yourselfers could in a month.

Nevertheless, in most states you don't need to go agentless to save on commissions. Offering your agent an exclusive could help you negotiate a lower commission. Additionally, discount agents like eRealty.com and YHD Foxtons charge commissions ranging from 3.5% to 4.5%--a price that includes an MLS listing. Finally, some traditional agents now offer rebates or frequent-flier miles. If you sell a $500,000 home through GMAC Real Estate, for example, you can earn 125,000 Delta Skymiles. And what better time for a vacation than right after moving?

HOW MUCH HOUSE CAN I AFFORD?

Don't rely solely on your lender for an answer. "Mortgage companies don't care about your 401(k) or your vacation plans," says Stewart Welch III, a financial planner in Birmingham. "If you accept some of their deals, it'll leave you house poor--without enough money to invest for your future."

We like the classic 28/36 rule (still used by most lenders), which limits post-purchase housing expenses (including mortgage payment, taxes, insurance and maintenance) to 28% of gross income and caps total debt obligations (from mortgage payments to credit-card and student-loan payments) to 36% of gross income. Online calculators at www.money.com or Fannie Mae's Homepath.com can help you do the math.

Boston renters Troy and Kristen Wylie, 30 and 29, were thrilled when they were pre-approved for a $350,000 mortgage. Their combined income is $135,000, so they could easily meet the $2,000 a month they'd pay on a 6.25% 30-year mortgage. But with local home prices rising furiously, they haven't found a house they like. Their mortgage broker says they could qualify for a $400,000 loan, but the Wylies don't feel comfortable taking on that much debt. Says Kristen: "We don't want to give up the rest of life's enjoyments so that we can pay for the house."

HOW MUCH CAPITAL-GAINS TAX MUST I PAY WHEN I SELL?

Since 1997, capital gains up to $250,000 ($500,000 for joint filers) on the sale of a primary home can be kept tax-free forever--as long as you've owned and lived in the house at least two years. You no longer get a tax break if you're over 55. And you can no longer roll your gains into a more expensive pad. That's too bad if you live in an area where prices have soared so much that 500 grand doesn't add up to very much house. But for most of us, this is the best tax deal going. And since you can turn over one home every couple of years, it may make more sense than ever to buy a house that needs some work, fix it up and sell it at a tax-free profit.

Look at Todd Hays of Pasadena. The 41-year-old p.r. exec has renovated and sold eight homes since 1984, including two primary residences since 1997. His most recent sale: $475,000 in 2001 for a house that cost him $305,000 in 1998. He spent $53,000 improving the place. "It's phenomenal," Hays says of his $92,000 gain after sales costs. "I don't know anything like it where you can make so much money tax-free. Some of my friends think I'm crazy for doing this, and I think they're crazy for not doing it." Hays stays in his houses, on average, for 2 1/2 years and looks for homes that have retained most of their original style and structure--from Victorian to '50s modern. "If the house looks ugly, all the money in the world won't make it beautiful."

WHICH IS BETTER, A 30-YEAR OR A 15-YEAR MORTGAGE?

Depends. "If your ultimate goal is affordability, the 30-year offers an extremely attractive rate," says Lori Vella, a senior vice president with Washington Mutual. "If you want to pay off the mortgage as quickly as possible, the 15-year is best."

Beth Cole, a 56-year-old secretary in Waterloo, Iowa, took out a 30-year 6.88% mortgage on a home she purchased in May. Even with the low interest rate, the recently divorced Cole wondered about her ability to carry the monthly payment and manage the rest of her budget. Over the summer, however, Cole grew less excited about the idea of making house payments until age 86. So in October, she went to her local credit union and traded her 30-year mortgage for a 15-year 5.25% loan. "Now that I have more of a feeling of what my expenses are, I can afford the extra payment."

On a $200,000 loan, a 15-year mortgage will cost an extra $429 monthly--hardly small change--but the interest savings over the life of the loan are amazing: You would pay the bank $89,200 in interest, compared with $224,300 over 30 years. Many planners recommend choosing the 30-year loan but making payments as if it were a 15-year. You pay off your mortgage faster, with the flexibility of forgoing the extra payments if necessary. (Use Bankrate.com's mortgage calculators to see the effect of additional principal payments on your payoff date.) This can be especially smart for those whose incomes fluctuate--the self-employed, for example, or salespeople on commission. Just consider carefully whether you have the discipline to keep making that extra payment every month.

CAN I GET RICH INVESTING IN REAL ESTATE?

Some people do. The real question is: Are you willing to make the commitment? The time required to scout properties, arrange financing, find tenants and collect rent can add up to a second full-time job. n Just ask Karen Rivers-Williams. A 40-year-old single mom in Shaker Heights, Ohio, Rivers-Williams started investing in real estate seven years ago when she needed money to pay for her son's private schooling. After some research, she shelled out $65,000 for a two-family home where the tenant's rent covered two-thirds of the mortgage. n Today she owns five homes valued at $455,000. But while she earns three to four times as much from her real estate as she does from her regular job (Rivers-Williams drives a school bus in neighboring Cleveland), there's a lot more to it than cashing checks. "I have had some bad experiences," she explains. One tenant stole her doors and a bathroom vanity. Another left water running and flooded the house. "One lady called and said she was not going to pay rent because her car broke down and the money in the bank was for her kid's vacation. The thing I learned early on is not to get mad at renters. It's a job. It's not personal. If they don't do what they're supposed to do, that's what the courts are for."

HOW DO CREDIT SCORES AFFECT HOME LOANS?

Good credit ratings are a bit like grades at Harvard: a surprising 80% of us get an A. Even with a good rating, however, it is your three-digit credit score that most affects how much you'll spend or save over the life of your home loans.

Scores are determined by your credit-repayment history and such factors as the amount of available credit you've actually tapped (less than 33% is considered ideal) and the types of loans you've had over the years. Consider the FICO score, a key yardstick developed by Fair Isaac that three-fourths of all mortgage lenders now use to help determine their rates. FICO scores range from 300 to 850 (the U.S. median is 725), and many lenders consider 620 and above to be A-level stuff. The table below shows how widely rates on mortgages and other loans range, depending on one's FICO score. A 620 in early November, for instance, commanded only 7.84% on a 30-year mortgage--even in this low-rate environment. But a 675 could get 6.69%, saving $28,000 over the life of a $100,000 mortgage. (To find out how much you'd save by qualifying for a lower rate, go to www.myfico.com; the online calculator is free, but the company charges $13 for your credit score.)

If you have a low score of 600, you can improve by 20 points or so in a few months simply by paying more bills on time, fixing mistakes on your credit report and paying off balances. Once you've crossed the line into A-range credit, however, it gets harder and harder to improve a score--kind of like the last few pounds on a diet. So keep in mind that although these scores are important, lending decisions aren't based solely on whether you have, say, a 715 or a 720. Your income, down payment and overall debt load play important roles as well.

KEEPING SCORE Average interest rates nationwide, by Fico score

NOT GOOD GOOD MORTGAGE OPTIONS 500-559 560-619 620-674 675-699 700-719 720-850

30-year fixed rate 8.88 8.51 7.84 6.69 6.15 6.03 15-year fixed rate N.A. N.A. 7.31 6.16 5.62 5.50 One-year adjustable rate N.A. N.A. 6.23 5.08 4.54 4.41

HOME-EQUITY OPTIONS 500-559 560-639 640-659 660-679 680-719 720-850

Home-equity loan 12.62 11.37 9.87 9.10 8.60 8.30 Home-equity line of credit 11.88 10.38 8.88 7.50 6.25 5.88

Notes: As of Nov. 5. N.A.: Not available for people with that credit score. Sources: Fair Isaac, Informa Research.

HOW CAN I INVESTIGATE THE QUALITY OF A LOCAL SCHOOL SYSTEM?

It's easier than it used to be. The past few years have seen an explosion of programs designed to measure school performance, and the Internet has made it possible for parents to access those report cards with ease. That's where Bob and Patty Stein discovered GreatSchools.net, a website that provides a wealth of data for nearly every public school in the country. Profiles include test scores, class size, demographics and the percentage of high-schoolers taking Advanced Placement classes. Best feature: powerful search and ranking tools that let parents compare schools across a city, school district or state. For some states, including California and Florida, the site offers additional teacher data, such as average years of experience and the percentage with advanced degrees. The Steins, who are looking to move from Florida to Maine, used GreatSchools.net to determine which towns have good schools for their four kids, ages five to 14. Under consideration: Yarmouth and Veazie. Other good sources are state education department websites, which generally provide school report cards and links to local districts. Bob Stein did his homework offline as well, asking real estate agents for contacts and even cold-calling schools. "You need multiple sources of info," he says.