(MONEY Magazine) – YOUR REAL ESTATE QUESTIONS ANSWERED

What can you afford? page 103 Today's best mortgage strategies page 105 Help for first-time buyers page 106 Do you need a broker? page 106 Which home renovations pay off page 107 How to lower your insurance premiums page 108 Tips for hiring a contractor page 108 Fight rising property taxes page 110 Tax-saving ways to pass down a home page 110 The keys to buying a vacation home page 112 How to become a landlord page 115

Buying: what can you afford?

Estimating how much home you can afford is a snap now that seemingly every personal-finance and real estate website--including www.money.com--has a calculator that'll come up with a number based on interest rates and your income, debt and savings. Most stick by the so-called 28/36 rule, the lender guideline that caps total housing expenses (mortgage, homeowners insurance, property taxes and maintenance) at 28% of your gross income, and total debt payments at 36%. In today's competitive market, however, lenders have relaxed debt-ratio rules. Should you ignore the limits just because you can? If you expect substantial salary increases over the next few years, you could do so without taking on substantial risk. Plus, those ratios don't take into account that interest payments and taxes are deductible--if you're in a high bracket, the tax savings may make high payments easier to handle. But a big debt burden leaves you little breathing room. Says Steve Rhode, president of credit counseling service Myvesta: "The more highly leveraged you are, the smaller the unpredictable event has to be for you to lose your home."

Hot home-equity deals

Record refinancings mean consumers are paying off home-equity lines of credit. So lenders are vying for business harder than ever. Virtually everywhere, you can borrow at the prime rate--now 4.25%, the lowest since the 1950s--and below-prime deals are becoming widely available (as these top loans in five major markets show). For rates in 50 cities, go to www.hsh.com.

BOSTON Boston Federal Savings Bank (800-688-5626): prime minus 0.5% CHICAGO Liberty Bank for Savings (773-792-2211):prime minus 1% DENVER Key Bank (800-539-2968): prime minus 0.25% NEW YORK CITY Apple Bank (800-333-2775): prime minus 1% SEATTLE Key Bank (800-539-2968): prime minus 0.25%

CLOSING COSTS: WHAT'S NEGOTIABLE

Closing costs are notoriously tough to compare, and "good-faith estimates" are often anything but. Can you deal? Yes and no. Recurring costs such as property taxes and homeowners insurance are not open to negotiation. One-time fees--the lender's attorney fees ($300 to $500), document-preparation fees ($150 to $300), the appraisal ($200 to $300) and the title search ($300 to $600)--are on the table. If you're buying and can't get the lender to budge, ask the seller to pitch in. Shifting certain closing costs such as the appraisal, underwriting fees and title search and insurance to the seller is a growing trend and can save you as much as $8,000. * If you're refinancing, you have only the lender to pressure. Obvious third-party jobs, such as credit reports and appraisals, are often marked up by the lender, so it can pay to comparison shop. As long as you're specific about which items a competitor is discounting--most lenders are too experienced to fall for empty threats--you may be able to extract a better deal. The title industry offers refinancers a discount called a reissue rate, which saves you as much as 50%. There are time restrictions, and state rules vary. * Today a few lenders, including GMAC Mortgage and ABN-AMRO, offer guaranteed settlement cost packages, which are fixed closing costs, quoted up front. The trade-off may be a slightly higher rate.

Hidden costs of home buying

Once you buy, you still face daunting expenses. A recent study from Harvard's Joint Center for Housing Studies found that homeowners spent, on average, 6.5% of the initial value of their homes on upgrades between 1995 to 2001. Although some renovations--like additional closets, decks and extra bathrooms--may be an optional expense, the study suggests that many older homes are being upgraded because their basic systems and structures, such as electrical wiring, roofing and insulation, need to be modernized. * What about the yard? A survey by Harris for the National Gardening Association found that last year the average cost of landscape design and installation was $4,967. Typical maintenance costs: $550 a year.

HOME EQUITY How low should you go?

The booming housing market is masking a striking fact: As a nation, we aren't building equity in our homes. According to a 2000 study by Freddie Mac and the Consumer Federation of America, the average U.S. homeowner's equity--the home's value minus mortgage balances--fell 2% during the 1990s, if you factor out price gains. Since then, the amount of cash Americans have pulled out of their homes has jumped sharply (see the graphic below). Even with super-low interest rates keeping a lid on debt payments, using your home as a bottomless piggy bank can backfire. If you own, say, 10% of your home and the value falls and you decide to sell, your mortgage could exceed your proceeds after a 5% or 6% commission. * You could also be leveraging yourself out of a comfortable retirement. Not only do small or no mortgage payments let you live well on a smaller retirement income, but having a sizable chunk of equity allows you to explore other cash management strategies after you stop working, such as a reverse mortgage (see page 110) or trading down to a smaller home and using the cash to cover other bills.

Total equity withdrawn through cash-out refinancing (billions) '93 $16 '94 $12 '95 $11 '96 $17 '97 $23 '98 $42 '99 $37 '00 $21 '01 $84 '02 $90 Source: Freddie Mac.

NEW CONSTRUCTION The latest in home building

Home builders are bending over backward to accommodate buyers' desires. Here are the biggest trends you'll see in all kinds of homes, from the not-so-simple prefab to the deluxe custom job.

MODULAR HOME These factory-built houses made of two to eight pieces and assembled on-site haven't entirely shed the stigma of their mobile-home roots. But new technology means that prefab homes don't look, well, prefab. Many now sport attractive pitched roofs, and some customization is possible. The cost is up to 15% less per square foot than a traditionally built home.

PRODUCTION OR SUBDIVISION HOME These are blocks of houses built by developers; they go from entry level ($100,000) to million-dollar McMansions. Options have become fancier, from a walk-in glass shower for two to a coffee bar in the bedroom.

SEMICUSTOM HOME This upgraded production house offers home buyers a greater degree of customization beyond the standard options, even in average-priced homes (from $200,000 to $300,000). Popular lately are panic rooms and massage rooms.

CUSTOM HOME When it comes to a unique house built on your own land, big is in--from double-story libraries to master bedroom suites. The well heeled are also hiring a slew of creatives: architects, kitchen coordinators, facade designers. On the budget end, you're the general contractor: You buy readymade plans, secure the permits and hire the subcontractors, as needed.

Warning: materials that could cost you

If your home--or the one you might buy--was built in the past 30 years, listen up. Some building materials used back then have proved to be downright defective. Here's a guide to three problem-plagued materials and what you can do if you have them.

PRESSURE-TREATED WOOD Used for decks, picnic tables and playsets, this lumber is treated with chromated copper arsenate, which contains arsenic. There's no official word on the health risks, but the wood will be banned from home use later this year. If your deck is made of CCA-treated wood, you can seal it with polyurethane ($20 a gallon). Or you can rebuild: An average-size deck (320 square feet) costs about $6,000.

POLYBUTYLENE PLUMBING These leaky plastic pipes were installed in millions of homes from 1975 to 1995. If you have this plumbing, you may qualify for free repiping (typical replacement cost: $5,000). Contact the Consumer Plumbing Recovery Center (www.pbpipe.com; 800-392-7591).

SYNTHETIC STUCCO This late-1980s siding has no internal drainage system, so it often traps water, which leads to toxic mold and wood rot. You can reside the house in cedar or brick siding (a $60,000-plus job for an average home with this stucco, or $20 a square foot). Many homeowners have sued over stucco, and recently a settlement was reached in a national class-action suit against major manufacturer Dryvit Systems. To see if your house is covered by it, go to www.stuccosettlement.com.

CREDIT SCORE POWER

Before you borrow, see what lenders see. Order your credit score and a combined report from all three credit bureaus for $39.95 from www.myfico.com. The site's loan savings calculator will show you what rate you can expect based on your score and how much you could save if you improved it. To do so in just a few months, pay bills on time and cut credit-card balances to no more than 70% of your limit. Don't apply for unnecessary loans and don't close accounts right before getting a home loan--doing so shortens your credit history and hurts your score. You want to see all credit reports because Equifax, Experian and TransUnion can have different data--and mistakes. Fixing errors can take a month or more. If you can't wait, ask your lender about rapid rescoring--a relatively new service that can fix mistakes in as little as 72 hours.

Best of the Web: loan rates

Get the latest information on mortgage and home-equity rates, and track down the best loan deals in your area. Plus, you'll find useful calculators and hundreds of articles on home buying and borrowing. www.bankrate.com

A GUIDE TO HOMEOWNERS ASSOCIATIONS

About 80% of homes built in the past five years are part of a homeowners association (HOA), the group that maintains the pool or decides whether you can keep a dog. Some are run better than others, so to protect yourself and the value of your home, you and your lawyer should read the latest annual report and the bylaws--the covenants, conditions and restrictions--which define every homeowner's responsibilities, from property upkeep to dues. Focus on the following key areas. * DELINQUENCIES If it's not noted in the annual report, ask the association manager what percentage of homeowners are delinquent more than 90 days. If the figure is more than 10%, it can point to a badly run HOA or neighbors with overstretched budgets. * RESERVE FUND This money is put aside for long-term projects and emergency repairs. A healthy one should be equal to at least 20% to 40% of monthly assessment revenue, suggests Richard Thompson, a reserve fund specialist. "It's easy to be lulled into complacency," he warns, "until a $50,000 roof repair comes up and you have $10,000 in the reserve. Then you have to have a special assessment." * OWNER-OCCUPANCY LEVEL Buy in a community where at least 60% of residents are owners. You'll have problems getting a mortgage otherwise. For more on HOAs, see www.caionline.org and www.regenesis.net.

Mortgages: fixed vs. adjustable

With plain-vanilla fixed-rate mortgages so attractive nowadays, does any other mortgage stand a chance? Judging from the array of new loans on the market, lenders think so. Here are some popular ones you may hear about--and may want to consider.

ADJUSTABLES With the rate on a 30-year fixed mortgage at historic lows, most borrowers should pass on an adjustable-rate mortgage (ARM), despite the alluring rate (a one-year ARM recently averaged 3.72%). Let's face it: Your payments have little else to do but go up. Once they do, the rise could be quite sudden--from 1994 to 1995, rates jumped from 4.2% to 6.8% in one year. But ARMs do make sense in certain situations. "The reality is that most people are never in the house long enough to enjoy the tail end of the savings on a 30-year fixed," says Chris Larsen, CEO of online mortgage lender E-Loan. If you know you will move within the next few years, a hybrid ARM (which has a rate that's fixed for a set period and then adjusts annually) could save you thousands. Right now, the 5/1 ARM, with an average rate of 4.3%, looks especially attractive.

LIBOR AND COFI Most ARMs are tied to Treasuries; others move with the Libor index, which is based on the interest rate that European banks charge each other, or the COFI, or cost-of-funds index, which is based on U.S. interbank rates. Today the rates on one-year Libor loans are similar to those on traditional ARMs. You can find a COFI-based loan as low as 1.95%, but be careful: COFI loan rates usually adjust monthly after three months. You can cap your payment increase, but rate hikes in excess of that cap will be tacked onto the back end of your loan. If rates rise sharply during your loan term, you could face a big balloon payment at the end.

INTEREST-ONLY These loans (usually variable-rate but sometimes fixed), once available only to the ultrarich, are becoming increasingly popular, says Larsen. The appeal: Because you're not repaying principal for the first 10 years or so, you can take out about 20% more loan for the same payment. The catch: You build no home equity. These loans work best for borrowers who know their income will rise by the time higher principal payments kick in or those who have the discipline to periodically prepay principal.

EQUITY ACCELERATOR For a few hundred dollars, lenders will set up this biweekly mortgage payment program. Making 26 payments annually knocks several years and thousands of dollars of interest off your loan. Great idea, but there's really no need to pay for the benefit. Just make extra payments and tell your lender that you want them applied to your principal.

RENOVATIONS Tax breaks on historic homes

If you own a building listed in the National Register of Historic Places or one situated in a registered historic district certified by the National Park Service and you plan to fix it up, you may qualify for a federal or state tax break (or both). Which credit you qualify for boils down to whether the historic property is your home or a business. Only landlords qualify for the federal break, but some states offer live-in homeowners a credit as well.

FEDERAL You can qualify for a federal tax break--a credit for up to 20% of qualified renovation costs--if you own income-producing property (a rental home, a B&B or a business). To qualify, the renovations must take place within two years and cost more than $5,000, and you have to get park service approval before even so much as a hammer is thrown in the house (otherwise you may lose your historic certification and the tax break). For details on other restrictions, go to www.nps.gov.

STATES Seventeen states offer homeowners an income tax credit for a rehab of their historic home. (Several offer breaks for landlords as well.) North Carolinians can take a credit for up to 30% of rehab costs on a $25,000-plus job, for instance; Maryland residents, a 25% credit on $5,000-and-up rehabs. You can find a full listing of state commercial and residential tax credits at www.nationaltrust.org.

SELLING Do you need a broker?

Before you bypass a real estate agent, consider these rules of the game.

1 You're not on your own. If you market your house as a so-called For Sale by Owner (FSBO), your key challenge is settling on an asking price. You can ask an agent for a free comparative market analysis, which shows asking and selling prices of nearby properties. (When selling prices are higher than the listing, it's a seller's market--the FSBO's friend.) Just be up front that you're leaning toward selling on your own (and listen to the sales pitch). But you also have access to listing and sales figures--through the local classifieds, the county clerk's office and www.domania.com (see below). Compare your house with truly similar ones that sold within the past six months.

2 The commission is not the only cost. You'll pay a flat listing fee of $300 to $600 to register your house on a FSBO website. Also consider the hours you'll spend on research and appointments and the fees for additional marketing, lawyers and other pros.

3 You can have it both ways. An excellent compromise is to put your house in the multiple-listing service (MLS) through a website like www.fisbos.com, www.forsalebyowner.com or www.getonmls.com. The MLS is available to all member real estate brokers. According to the National Association of Realtors, 75% of homes are sold through MLS listings; only 16% of FSBOs are sold without the listing. Once you're on the MLS, a broker may contact you with a seller and then ask for a 3% commission if the sale is successful.

According to agents surveyed by the real estate website HomeGain.com, these presale improvements generate the best return on investment as measured by a higher selling price RETURN ON PROJECT TYPICAL COST INVESTMENT

Lighten and brighten home, wash windows $86 to $110 769% Clean and de-clutter $305 to $339 594 Landscape and trim front yard and backyard $432 to $506 266 Repair electrical and plumbing problems $338 to $381 196 Spruce up decor, including flowers $812 to $1,089 169 Update kitchen and bathroom $1,546 to $2,120 138

Source: HomeGain.com's May 2000 survey of about 2,000 agents in 46 states.

Best of the Web: home values

At this real estate site, you can look up the sales prices for homes in your neighborhood (or anywhere) since 1987 and get a free estimate of what price you could fetch for your house now. www.domania.com

HELP FOR FIRST-TIME HOME BUYERS

For buyers new to the market, pulling together a down payment is the main challenge. Here are some options. * Start with the Federal Housing Administration. It offers mortgages with competitive interest rates, low down-payment requirements and closing costs you can finance. The maximum loans range from $154,896 to $280,749, depending on where you live. Call 800-483-7342 or go to www.hud.gov for a list of approved lenders. * Next, look into Fannie Mae's Flex mortgages, which let you borrow up to $322,700 (in 2003) with very little or no money down. The Flexible 97 requires a 3% down payment, which can come from your personal savings as well as from gifts, unsecured loans, or loans backed by 401(k)s or the cash value of life insurance policies; the Flexible 100 requires no down payment. You still have to cover closing costs--a minimum of 3% of the mortgage--and mortgage insurance. Call 800-732-6643 for info. * Finally, consider an 80/20 loan--these mortgages allow you to borrow the entire cost of your home by combining a first mortgage (80% of the home's value) with a second (to cover the remaining 20%) at a slightly higher interest rate. Plus, with an 80/20 loan, you don't pay private mortgage insurance. COUNTRYWIDE HOME LOANS (800-570-9888) offers borrowers an 80/20 loan for up to $500,000. With the similar 80/15/5 loan from NATIONAL CITY MORTGAGE (800-523-8654), you can borrow up to $380,000. You'll have to put down 5%, but borrowers with good credit can finance it with gifts or grants from family, nonprofits, public agencies or an employer. That max goes to $815,000 if you use loans backed by a 401(k) or life insurance policy.

Tax rules capital gains

The capital-gains exclusion on the sale of your home remains a bright spot in the tax code. For the past six years, married homeowners who meet certain simple conditions have been able to shelter $500,000 in gains when they sell their primary home. For single taxpayers, the break is $250,000. To be eligible, you must have owned and lived in the home for at least two of the five years before the sale. (They don't have to be consecutive.) A recent IRS clarification: People who sell their homes in less than two years for certain reasons--a job relocation, health, divorce or other unforeseen circumstances--may now be eligible for a partial tax break. Brighter still, the rule is retroactive. Check with your tax preparer to see if you should file an amended return.

Refinancing without a new loan

Refi activity is still at a near-record pace. Yet some would-be refinancers are deterred by closing costs, which average several thousand dollars and can outweigh the savings from a lower rate. To trim expenses, see if your lender offers a streamlined refinancing. Not only will you cut down on paperwork, you may be able to skip a new credit report or appraisal, saving you several hundred dollars. If your lender still owns your loan (less than 10% of mortgages are so-called portfolio loans), you may qualify for a loan modification, which simply lowers your rate without stretching out your term. Finally, you may see advertisements for no-cost or no-fee refinancings. In this case, lenders generally roll their fees into a slightly higher interest rate.

Tax rules: refis & home equity

Low interest rates have elevated mortgage refinancing and home-equity borrowing to national sports in recent years. Now comes the tax hangover. * REFINANCING You can usually deduct the points you pay on your original mortgage the year you pay them. Not so with a refinancing. Instead, you typically must spread the deduction over the life of the loan. An exception: If you do a cash-out refi to pay for home improvements, the points attributable to the cash used for home improvement may be fully deductible. And if you are refinancing for the second (or third) time, you can now deduct all remaining points. * HOME EQUITY The same rules for deducting points apply to home-equity loans and home-equity lines of credit. When the money is used for work on the house, the points are deductible in the year the loan is taken out. If you use the extra cash for something else, you must spread the deduction over the length of the loan. * The limits on deducting interest on home-equity loans are also tricky. The IRS caps the amount of home-equity debt for which you can deduct interest at either $100,000 ($50,000 if married filing separately), or the total of the home's fair market value minus the amount of the existing mortgage debt, whichever is smaller. The interest paid on any amount you borrow above these thresholds is not deductible.

RENOVATIONS: WHAT PAYS OFF

Every homeowner who installs a Sub-Zero fridge or home theater wonders: Will I earn back my investment when I sell? The answer depends on the room (kitchens and baths are best) and geography. Remodeling magazine's latest look at what portion of remodeling costs you'll recoup after one year covers three common jobs: converting a basement into an entertainment center, remodeling a 200-square-foot kitchen and updating a 25-year-old bathroom. In general, you do best in hot markets such as Boston, Chicago, L.A., New York City and San Francisco.

BASEMENT

AVERAGE REMODELING COST: $43,112 % RETURN ON COST: East 76% Midwest 60% South 83% West 100% National 79% HIGHEST: Los Angeles 174% LOWEST: Columbus, Ohio 22%

KITCHEN

AVERAGE REMODELING COST: $43,213 % RETURN ON COST: East 71% Midwest 60% South 66% West 76% National 67% HIGHEST: Los Angeles 130% LOWEST: Columbus, Ohio 39%

BATHROOM

AVERAGE REMODELING COST: $9,720 % RETURN ON COST: East 89% Midwest 79% South 76% West 104% National 88% HIGHEST: Los Angeles 155% LOWEST: Baltimore 51%

Note: Survey of real estate agents, appraisers and construction firms in 35 markets. Source: Remodeling magazine, November 2002.

BORROWING Brokers' fees

In theory, mortgage brokers are personal shoppers, sorting through loan deals on your behalf. Yet their fees--which range from 1% to 4%, depending on your credit--are often buried in what's called the yield spread premium, or the difference between the rate you qualify for and the one you receive. This lack of transparency can cost you, says Keith Gumbinger at mortgage tracker HSH Associates: "If you don't know all the numbers, it's hard to shop smarter." Under new rules proposed by the federal government, brokers would have to disclose how they are paid. (The proposals also call for better estimates of closing costs.) Industry groups such as the National Association of Realtors have criticized the proposal, so it's not clear if or when the rules will be enacted. Until then, it's up to you to demand disclosure.

INSURANCE PREMIUM TIPS

Rates are soaring and insurers are dumping homeowners and have even stopped writing policies in certain states. How can you tame your premiums?

1 Know your history. When you ask for a rate quote, an insurer takes a look at your house's claims history. Frequent claims will likely mark you as a bad risk. A house with past water damage may be uninsurable. See what the insurer sees by ordering your CLUE report (Comprehensive Loss Underwriting Exchange). It's $13 at www.choicetrust.com (and free in some states). You can challenge mistakes and submit updates.

2 File fewer claims. With insurers raising rates and dropping policies if homeowners file frequent claims, you may want to rethink submitting every repair bill, or even calling your agent, which often triggers a claim file. If the repairs will cost only a few hundred dollars above your deductible, you may be better off footing the bill.

3 Cover more yourself. Raising your deductible from $250 to $1,000 will save you 20%.

4 Maintain good credit. Most insurers reward good bill-paying and debt habits.

5 Bundle policies. You can save a good 10% to 20% by buying your auto and homeowners policies from the same insurer.

6 Reinspect your home. To catch small problems early, hire a home inspector to do a maintenance consultation every five years or so. Cost: $300 to $500.

Home improvement how-to

The unscrupulous contractor is a persistent nightmare: one who vanishes with your deposit or whose shoddy work becomes obvious after it rains. Protecting yourself from this loathsome beast is a function of homework and diligence. Here's what you can do.

Get referrals. Query people you trust who have remodeled successfully. Tap building-material suppliers, architects and lenders for ideas too.

Ask the right questions. A good contractor will have a list of former clients. It's up to you to call and ask how it went, says Jon Harbour, a Boulder contractor. The best questions: Would you hire this crew again? Was the work site neat? Was the project completed on time? On budget? Ask for a certificate of insurance and call the bonding company to verify it. Contact your state's contractor licensing agency and local building inspectors to see if the contractor is properly licensed and has a clean record.

Get estimates from three pros. The clearer you are about the kinds of materials, appliances and custom work you want, the more accurate the estimates will be. Also, ask whether the builder has any special arrangements with manufacturers, suggests Harbour. "You might be able to save money on certain appliances or materials that way."

Spell out details early. Determine which permits are needed for what and how long they will take to get. Will the water be shut off? Clarify who will be moving and returning furniture, and verify that the site will be cleaned daily, including trash removal. Review how the workers and equipment will get to the site without disturbing neighbors or the landscaping. What parts of your home will be off limits to the crew? Decide what materials and equipment will--or won't--be stored in your home (including anything hazardous).

Work up a thorough contract. The final contract should spell out in detail the what, where, how, time frame and cost (with payment schedule) of your project. It should also include any floor plans or blueprints, a complete list of all materials and a lien release so that you are not held liable for third-party claims for nonpayment (from vendors, say). Work out a dispute-resolution clause too. And remember, you have the right to cancel the contract within three days of signing it if you change your mind. Your best bet? Have a lawyer review your contract before you sign.

What to do now so you can age at home

There's no place like home--especially for seniors who need an affordable retirement living option. A new solution on the scene is aging in place, a home-based alternative to costly assisted-living facilities and, in some cases, even nursing homes. * The concept: Make structural, yet pleasing, adjustments to your home now that will allow you to grow older safely and independently in familiar surroundings. Ideally you'll start renovations well before you need them (and while you're still working so you can foot the bill). * "These changes don't have to look clinical," says AARP public policy expert Elizabeth Klemmer. "No 50-year-old thinks they need help in the bathroom, but reinforcing the wall during a remodel means that a towel rack can later be used as a grab bar." Aging-in-place renovations run from a few dollars (non-skid pads under throw rugs) to upwards of $50,000 (an elevator). But most jobs start in the $500-to-$1,000 range--building a ramp for the front steps, widening doorways to 32 inches, replacing doorknobs with levered handles or adding electrical outlets. Learn more about aging-in-place concepts and find a certified remodeler at www.nahb.org.

Best of the Web: remodeling

Locate a contractor in your area, estimate how much you'll spend to fix up your bathroom, kitchen and other spaces, and check out frequently asked questions--or post your own. www.improvenet.com

PROPERTY TAX PAIN Soaring real estate values and cash-strapped state and local governments add up to higher property taxes (see the graphic below). Your best hope to lower your tax bill is to appeal your assessment, which you can do for a limited time after you receive your property tax bill, typically between 30 and 120 days. Some statistics from the National Taxpayers Union should embolden you: Roughly 60% of taxable property is overassessed, and half of homeowners who appeal assessments win at least a partial victory. But fewer than one out of every 50 taxpayers appeals. Your chances of lowering your assessment are good if you can find a mistake in your property record (number of rooms, acreage and so on), available at your county assessor's office. (To locate your assessor, go to www.naco.org, the website for the National Association of Counties.) Another promising avenue is to show that your assessment is higher than the recent sales prices of similar properties in your neighborhood (find those records at www.domania.com). * For general information, visit the National Taxpayers Union at www.ntu.org, where you can order the booklet How to Fight Property Taxes for $6.95. Finally, if you are a senior or disabled, or if your income has recently dropped, ask if you qualify for a property tax relief program.

Retirement: make your home pay

If you're at least 62 years old and the bear market has battered your portfolio, consider swapping the home equity you've built in your primary home for cash with a reverse mortgage. * Here's how it works: You borrow against your home's value and the bank pays you in the form of a lump sum, monthly payouts or a line of credit. How much you can borrow depends on your age, the home's location and its appraised value, as well as the going interest rate. Eventually you or your heirs will have to pay back the loan (you could sell the house to cover the debt). If the value of the house sinks below the amount you owe, you're in the clear--lending regulations kick in and the bank basically takes a loss. * These loans are now more widely used than ever--2002 was a record year for reverse mortgages. One popular product is the home-equity conversion mortgage. It's federally insured and available from roughly 175 lenders nationwide. All offer the same interest rate--monthly or annual adjustables tied to the one-year Treasury--but origination fees and closing costs may vary. To compare fees of different loans, ask for the total annual loan cost, a good-faith estimate of itemized expenses that all lenders must disclose. * Visit the AARP Foundation at www.aarp.org/revmort for more on reverse mortgages. Or order the National Reverse Mortgage Lenders' free booklet, Just the FAQs: Frequently Asked Questions About Reverse Mortgages, at www.reversemortgage.org.

Estate: pass down your home

Your home will likely be the single largest asset you leave behind. Under current law, the first $1 million of your estate is tax-free; that exemption keeps rising until 2010, when the estate tax disappears, only to return a year later. * Certain gifting strategies can help cut the value of your estate--and prevent squabbling after your death. "No asset creates more animosity than a piece of real estate," says estate-planning attorney Martin Shenkman. Here's a look at four common ways to pass on your home. To set one up, you'll need the help of a knowledgeable attorney.

METHOD FRACTIONAL GIFT

HOW IT WORKS You make a gift of a certain percentage of your home (say 5%) every year.

PROS If you stay within the yearly gift-tax exclusion limit (currently $11,000), you can avoid taxes altogether.

CONS A paperwork hassle, since the house's cost basis changes annually. As partial owners, your heirs have rights.

[METHOD] QUALIFIED PERSONAL RESIDENCE TRUST

[HOW IT WORKS] Your put your house in a trust for your children and retain the right to live there for a certain number of years.

[PROS] The IRS method for valuing the gift discounts the house and cuts your taxes. You can stay after the trust expires and pay rent to your children, further cutting your estate.

[CONS] You can't later decide to sell. If you die before the trust expires, the house reverts to your estate.

[METHOD] FAMILY LIMITED PARTNERSHIP

[HOW IT WORKS] You transfer property to a partnership you control and gradually give heirs shares. The IRS discounts the value because the assets can't be readily sold.

[PROS] You retain control of the house during your lifetime. The assets are protected from creditors and lawsuits.

[CONS] Because the IRS says this partnership can't exist only for tax savings, it's best used for rental property, not your primary residence.

[METHOD] LIFE ESTATE

[HOW IT WORKS] You deed the home to your heirs (or a charity) but give a person the right to live there. When that "life tenant" dies, ownership transfers.

[PROS] Good for second marriages: Your new spouse can live in the home, but your kids from the first marriage inherit.

[CONS] No estate-tax benefit. If the terms of the agreement aren't specific, costly squabbles could ensue over who owns the furniture or pays for repairs.

TAX RULES HOME OFFICES

The home-office deduction is the cause of much taxpayer teeth gnashing. In a nutshell, if you are self-employed you can deduct certain costs (including taxes, interest, utilities, insurance, depreciation and repairs) if your home office is your principal place of business or where you meet clients. If you are an employee, you face a different set of tests. (If you have an office available to you, you're out of luck.) Thanks to recent clarifications by the Treasury Department, the deduction has become more taxpayer-friendly. Many workers have been skipping the deduction because previously when you sold your home you could owe taxes on the portion of your gain allocated to your office. No more. Generally, the change is retroactive for three years, so you can amend your return.

Mold: who should test

First, the scare: toxic mold, which is blamed for health problems from headaches to memory loss. Then, the products: You can buy a $10 kit that merely confirms the presence of mold or spend $100 to $300 for one that identifies the species of spore. A professional will inspect your home for $300 to $1,000 and up. Before you spend a dime, consider that mold is usually innocuous, although some people are severely allergic to it, and there are no standards for what types or amounts are okay. To prevent mold, keep down indoor humidity and fix even small water leaks. If you find mold, it's more important to clean it up than to identify the species. Scrub with bleach and water, and throw out moldy carpet. For extensive growth you don't think you can tackle, or mold behind walls that you can smell but not see, consider calling in a professional. Keep in mind that mold cleanup firms are unregulated and prices can range from $2,500 to $100,000-plus if demolition is involved.

SECOND HOMES What you need to know

The bear market has evaporated trillions of dollars of wealth over the past three years, but Americans haven't lost their affinity for one 1990s status symbol: the second home. In the past decade, annual sales of second homes grew by 36%, according to a 2002 study by the National Association of Realtors. Over the next decade, that figure is expected to jump even higher: American Demographics magazine forecasts that the market will grow nearly 50% by 2010 (see the chart below). "The straightforward explanation is that the number of people age 55 to 64--the ones with the greatest propensity to purchase a second home--is rising at 5% a year," says American Demographics founder Peter Francese. Other factors contributing to the current boom: low interest rates and a belief that real estate is a safer place to park cash than the stock market. In the Realtors survey, 37% of second-home buyers said they were more interested in making a profit than anything else (that's up from 20% in 1999). * If you're considering whether you can afford a second home, remember that the hidden costs are endless. Be sure to factor in a slightly higher mortgage rate, usually about half a percentage point more than what you pay on your primary home. Homeowners insurance will probably cost more too, particularly if the property will be empty much of the time (leaving it vulnerable to theft) and is in an area susceptible to wind or rain storms. * If you plan to rent out your second home for all or part of the year, the equation is slightly different. You'll need to fork over more money for a rental agent, cleaning service, repairman and a good accountant. If you rent the place more than 14 days a year, you'll need to pay taxes on the rental income. On the plus side, you may be eligible to take certain deductions for the cost of managing the property. * Consider location. The commute should be quick and easy (and cheap--don't forget to factor travel expenses into the equation). In fact, a desire to stay close to home is helping certain second-home markets. These days, according to Clark Thompson, CEO of EscapeHomes, buyers find small-town communities like Bend, Ore. and San Luis Obispo, Calif. just as desirable as well-known magnets like Phoenix or Miami. "A sound investment doesn't have to be in one of the traditionally 'hot' areas," he says. Instead, vacationing baby boomers want places where they can pursue multiple passions--like skiing and golf. * If you plan to rent for most of the year, make sure there are enough amenities in the area--shops, restaurants, outdoor activities--to attract visitors. And don't assume the property will rent every week that you want it to; experts say it's safer to assume that you'll be able to rent 75% of the time.

THE PERILS OF BUYING OVERSEAS

It is an irresistible dream--to buy a vacation home in a cheap foreign land. Fully awake, however, the dream can get murky. * BUYING As a foreigner, your ownership rights may be limited or subject to government reversal. Broker fees, insurance, exotic administrative costs and sales and transfer taxes further cloud the picture. You may have to pay unusual annual local taxes too. "Lots of countries charge occupancy taxes," explains Kristin Welch, a senior manager at Deloitte & Touche. An English-speaking local tax professional is a must. * GETTING A MORTGAGE--OR NOT Financing options vary widely overseas. Most U.S. banks won't write loans for foreign properties, so many people plunk down cash for their homes. One trendy alternative: a developer-financed home in an expatriate enclave. As with any middleman, referrals are key. Talk to buyers, run a check on the company and get local representation. * WHILE YOU'RE AWAY Certain countries, particularly in Europe, have strict payroll and benefit requirements for full-time staff. * SELLING You'll owe the IRS capital-gains tax on any profits because it's a second home. If a foreign currency exchange gain is involved (from the purchase to the sale), that's also taxable. And you may trigger sales taxes overseas too. Talk to your foreign and domestic tax adviser before you sell.

How to become a landlord

Dismal stock market returns have prompted many Americans to look seriously at real estate--an investment arena rife with unforeseen risks and hucksters, and occasionally great rewards. Tread carefully.

RENTALS Landlording involves big sums up front--banks ask for 25% down and charge higher rates than on a loan for a home you live in. But once you've got one rental, you can tap the equity to buy others.

Challenges: Problem tenants may damage walls and floors, skip out on rent or have to be evicted. A building in a bad location, or one with hidden flaws such as termites, can become a money pit.

Our advice: Choose a neighborhood rich with potential renters--say, one in a city that attracts recent college graduates--so you can be more selective. Know how much the upkeep, from lawn mowing to replacing windows, will cost.

FORECLOSURES You buy an unloved property cheap, fix it up and flip it for a profit. Foreclosures hit a record 1.2% of mortgages last quarter, following a rise in delinquencies, so there are many to choose from.

Challenges: Large-scale renovations notoriously go over budget. Stay away from no-money-down schemes that advocate bad moves like borrowing against an IRA or tapping credit cards. Financing can be hard to find--big banks won't accept distressed property as collateral; the smaller banks that do may require 20% down.

Our advice: Stick with a structurally sound building--problems like asbestos or lead-based paint can doom your project. Seek out local real estate investment associations, where members share tips on finding deals and sometimes team up to get financing.

LAND A scarcity of desirable land is driving up prices across the country. If you have the luck or foresight to buy raw land that turns out to sit in the path of future development, you could reap rich returns.

Challenges: Choose unwisely and you're sitting on a useless property for decades, never to see a return. Also, only a few banks lend money to buy land.

Our advice: Put no more than 5% or 10% of your total portfolio in highly speculative investments like land because you may never see that money again. Go through a mortgage or land broker to find a suitable property and a bank that specializes in undeveloped land--be prepared to put 50% down. Check out what you're buying with a licensed appraiser who specializes in vacant properties, a surveyor, a soil engineer and a lawyer familiar with local zoning codes.

Best of the Web: buying and selling

Real estate agents from around the country weigh in on their local housing conditions: Is it a buyer's or seller's market? Are prices rising or falling? Plus, the site offers news and advice. www.realtytimes.com

Records to keep

If there was ever a time for diligent record keeping, says John W. Roth, analyst for CCH's federal tax group, it's when you remodel. The right improvements increase your cost basis--and decrease your taxable gains when you sell. Even though the capital-gains exclusion ($500,000 for married couples, $250,000 for singles) is generous, says Roth, "property values over time can easily drive your profit beyond that threshold." According to the IRS, home improvements "add to the value of your home, prolong its useful life or adapt it to new uses." A new basement rec room, a fence or a bathroom renovation qualify. Painting, repairing floors or cleaning gutters do not. The escape clause: If the repairs were done as part of a remodeling project--say, painting to accommodate a new addition--those costs may be added to your cost basis.