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CHAPTER I -- THE GREAT AMERICAN DREAM

LESSON 1: BUYING VS. RENTING

"Should we continue renting or go ahead and buy?"
That's the question hundreds of thousands of Americans ask themselves every year. It's not an easy one to answer. Emotions, family and personal reasons all come into play in any home-buying decision. No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.

Let's start with some of the economic differences between renting and owning.

MythMany people believe that owning a home always provides a solid return on investment. Actually, a home generally doesn't earn as handsome a return as financial instruments such as mutual funds.
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If you're looking for the best return on your money, you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 to 10 percent, housing has appreciated on average in the low- to mid-single digits for many years. That means you shouldn't buy solely to generate an investment gain.

The graph below illustrates the stark contrast in investment return between housing and stocks over the past decade. In most years, the stock market outpaces housing appreciation.

Housing graph

On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes they pay each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a long-term mortgage when most of each payment goes toward interest rather than principal.

ExampleSay someone with gross annual income of $40,000 bought a home using a 7.25 percent, 30-year mortgage of $100,000 on Jan. 1, 2001. The monthly payment would be $682, excluding taxes and insurance, and this year, that borrower would pay $6,619 in interest. If he didn't have the mortgage, he would take a $4,550 standard tax deduction on his 2001 tax return (assuming he was a single filer). But by itemizing his mortgage interest, he would have $2,069 more to subtract from his income. This would provide a tax break of approximately $579.

Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don't have to worry about their housing costs shooting through the roof because mortgage lenders can't boost borrower rates and payments, unless those borrowers have adjustable-rate mortgages. (More on that in Lesson 4.)

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TABLE OF CONTENTS

CHAPTER I
  Lesson 1
  Quiz

CHAPTER II
  Lesson 2
  Quiz

CHAPTER III
  Lesson 3
  Lesson 4
  Lesson 5
  Quiz

CHAPTER IV
  Lesson 6
  Lesson 7
  Quiz

CHAPTER V
  Lesson 8
  Lesson 9
  Quiz

CHAPTER VI
  Lesson 10
  Lesson 11
  Quiz

CHAPTER VII
  Lesson 12
  Lesson 13
  Lesson 14
  Quiz

CHAPTER VIII
  Lesson 15
  Lesson 16
  Lesson 17
  Lesson 18
  Quiz

CHAPTER IX
  Lesson 19
  Quiz

CHAPTER X
  Lesson 20
  Quiz

CHAPTER XI
  Lesson 21
  Quiz

CHAPTER XII
  Lesson 22
  Lesson 23
  Lesson 24
  Quiz

CHAPTER XIII
  Lesson 25
  Lesson 26
  Lesson 27
  Quiz

CHAPTER XIV
  Lesson 28
  Lesson 29
  Lesson 30
  Quiz

Definitions




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