Nobody buys a home thinking they’ll wind up in foreclosure at some point down the road. Unfortunately, the wave of foreclosures spreading throughout the country indicates how widespread this problem has become. In 2007 alone, there were more than two million foreclosure filings in the U.S., according to RealtyTrac Inc. During the peak of the housing boom in 2005 and 2006, many borrowers took on adjustable rate mortgages with low “teaser” rates that rose after two or three years. As a result, the Mortgage Bankers Associations predicts that foreclosures will peak in 2008 as those ARMs continue to reset and more homeowners fall behind on their payments that will rise by hundreds of dollars. By some estimates, up to five million individuals and families could lose their homes to foreclosure between 2007 and 2010.

The rise of sub-prime lending–which peaked in the five-year period before the mortgage crisis of 2007–has contributed greatly to a growing number of homeowners stuck with high-rate mortgages they can no longer afford. I don’t excuse predatory loan tactics or banks that used incredibly bad judgment in making loans that should never have been approved. Clearly, however, lenders are not solely to blame for the country’s foreclosure mess. Homeowners bear a degree of responsibility as well.

Let’s talk about your rights and responsibilities as a homeowner. The choices you make as a property owner have a direct impact your ability to have sustainable homeownership.

The Seven Commandments of Successful Homeownership

Proper financial planning represents just one goal for which all homeowners should strive. There are seven goals in total.

Think of these objectives as the “Seven Commandments of Successful Homeownership.”

1. Always pay your mortgage on time

2. Keep up with all required property taxes

3. Make sure your home is consistently and adequately insured

4. Maintain your home in the best possible condition

5. Properly manage the equity in your house

6. Increase the rate of appreciation on your property

7. Take advantage of the financial planning and tax strategies that are available only to homeowners

Let’s examine the ways you can successfully preserve homeownership, avoiding foreclosure and other pitfalls property owners face. I don’t want you to become a statistic in the unfolding foreclosure crisis, and I know you don’t either. By adhering to the Seven Commandments listed above, you can have peace of mind and be assured of keeping your home for as long as you want it.

1. Always Pay Your Mortgage on Time

It sounds like a simple enough rule: always pay your mortgage on time. Unfortunately, that’s often easier said than done. Some people pay their mortgages late; that is, after the due date but before the grace period on their mortgage expires. It could be because of carelessness or a simple oversight on their part. The good news is that banks often give home borrowers a ten- or fifteen-day grace period on mortgages before they impose a late charge.

• Set up Automatic Mortgage Payments

Avoid the mistake of accidentally getting your payment in the mail or forgetting to make a payment by setting up your mortgage on an automatic payment system. Have the money come right out of your checking or savings account each month to bypass the hassle of getting stamps and writing a check for your mortgage. Instead, let the payment get electronically deducted. In this way, if you are traveling, your spouse neglects to pay the mortgage, or for some reason you’re not around to mail a check, your house payment will still get made.

• Prioritize Your Bills

We all have a laundry list of financial obligations, from house payments to utility bills to food and clothing expenses. Throw in transportation, various kinds of insurance, and the cost of raising kids, and you can easily see how all those bills can add up. No matter what debts you have, always think of your mortgage as top priority in terms of items to be repaid. If push comes to shove, you can work out a deal with your cell phone carrier and spread out payments of that unexpected cell phone bill, but you never want to get behind on your mortgage. Pay your house note first, next put other debts, such as credit cards, auto loans, or student loans in order of importance. If you’re delinquent on any of these debts it can hurt your credit, a fate you definitely want to avoid.

• Establish a Cash Reserve

Having a cash cushion is vital for homeowners. Once you get into a house, having extra cash on hand to deal with emergencies or unanticipated events can mean the difference between making your house payment on schedule and being delinquent on your mortgage. If something happens that has an impact on your finances–like you lose your job or suffer an illness that leads to big medical bills–you’ll be counting your lucky stars that you had the foresight to stash away some money for a rainy day.

2. Keep up With All Required Property Taxes

Missing mortgage payments isn’t the only way you can lose your home. Falling behind on your property taxes also puts you at risk of foreclosure. In fact, tax lien foreclosures take place every day in America. When you don’t pay property taxes you owe, your city or county has the legal right to put a high-priority tax lien on your property in the amount of the past due taxes, plus interest and penalties. After a set period of time–typically anywhere from six months to two years, depending on where you live–if your taxes are still unpaid, the taxing authority’s tax lien gives it the right to foreclose on your property. Your home then gets sold at an auction to anyone willing to pay off the back taxes. Lots of investors buy “tax lien certificates” in the hopes of getting a home in tax foreclosure. For these investors, it’s a way for them to purchase a home at a fraction of its value, without even having to pay off the mortgage due on the house.

The number-one reason people become delinquent on their property taxes is because these taxes can run into the thousands, driving up the cost of home ownership considerably. Some lenders want you to add your property taxes into the monthly mortgage payment you make, to be sure those payments get paid on time, so if the principal and interest on your mortgage totals $2,000 a month and your annual property tax bill is $2,400, that’s an additional $200 a month tacked onto your payment.

Check out the taxes paid in the following ten states, which have the highest property taxes in the country. You’ll notice that the top five states with the biggest tax bills are all located in the Northeast; however, even midwest states, such as Illinois, and western states, like California, make the list.

State Median Property Tax

1. New Jersey $5,352

2. New Hampshire $3,920

3. Connecticut $3,865

4. New York $3,076

5. Rhode Island $3,071

6. Massachusetts $2,974

7. Illinois $2,904

8. Vermont $2,835

9. Wisconsin $2,777

10. California $2,278

Source: Census Bureau, Tax Foundation

Even if you live in a community with high property taxes, there are some smart ways to go about lessening your tax burden and subsequently keeping your home.

Proven Strategies to Slash Your Property Tax Bill

Almost everyone hates to pay taxes, and it doesn’t matter whether they’re federal income taxes, state taxes, or local taxes on the house you own. Americans dread property taxes more than any other tax, according to the Tax Foundation, a Washington, D.C.-based research group. Not to worry. If you tax bill is particularly onerous or out of line with what others are paying for similar homes, you can often make a case for why your taxes should be reduced. To slash your property tax bill, try these tried-and-true techniques.

• Analyze Your Property Tax Card

As a homeowner, you’re entitled to visit your local tax assessor’s office and request a copy of your property tax card. This tax card contains detailed data about your house, such as the lot size, the number of bedrooms and bathrooms in your home, as well as information about improvements or upgrades to the house. If you find mistakes in this card, point it out to your tax assessor and request a reevaluation. That reevaluation could lead to your annual tax bill being lowered.

• Know the Tax Implications of Home Additions

Many homeowners want to improve or beautify their houses or simply make their residences much more livable. Before you satisfy your hankering for a new pool, an extra bathroom, or even a new storage shed in the back yard, find out how such an addition or structural change would change your property taxes. Any permanent structures you build, such as a deck or additional bedroom, will wind up adding to your tax bill.

• Compare Neighboring Properties to Your Home

Not only can you get tax information about your home, you can also research your neighbors’ homes. This information can be invaluable if you approach a tax assessor’s office to ask for a property tax reduction. Let’s say you notice that the taxes on your three-bedroom, two-bathroom home are higher than all other three-bedroom, two-bath homes in your area. This information gives you a factual basis upon which you can make a claim that your taxes are too high.

• Deal Honestly With Your Tax Assessor

If you ask for your property bill to be lowered, expect your local municipality to try to schedule an appointment with you for a tax assessor to come inspect your home. Some people try to dodge the tax inspector, afraid that this person might see nice things in the home or high-quality amenities, and raise the property taxes. If you’ve done your homework and you’re dealing in a forthright manner with the tax man, don’t worry too much about a tax increase. On the other hand, some cities automatically impose the highest tax rate possible on a home if a property owner refuses to grant the tax assessor access, so when the tax assessor comes to your house, whether the visit is scheduled or not, graciously welcome the person inside. Be sure to walk through the home with him or her, pointing out the good and the bad in your house. The tax assessor might note your nice hardwood floors or the granite countertop in your kitchen but miss the fact that your house doesn’t have new replacement windows or updated appliances. It’s your job to candidly point out these flaws, without going overboard. Just be matter of fact in mentioning your home’s high points as well as all of its drawbacks.

• Keep up With Current Market Values

One big reason that property taxes exploded during the past decade is because home prices escalated dramatically. Because skyrocketing home values led to reassessments on the upside, in theory, declining home values can also lead to lower assessments; therefore, keep abreast of local market values. If you live in a community or a state where prices have stagnated or fallen substantially, you might be due for a reduction of your property taxes. Just realize that reassessments (excluding those done when a home is sold) typically lag behind local market conditions.

3. Make Sure Your Home is consistently and adequately Insured

When you obtained your mortgage, your lender undoubtedly required you to have property insurance. Homeowner’s insurance covers your house in the event of a fire or some other catastrophe. In some states, such as earthquake-prone California or hurricane-prone Florida, you must purchase supplemental insurance coverage to guard against these disasters, which homeowner’s insurance typically doesn’t cover. All told, insurance premiums can run into the thousands of dollars each year. Despite the cost, always make sure your home is adequately protected. It can be disastrous if you let your insurance coverage lapse and then suffer a calamity like an accidental house fire. Expect basic insurance coverage to cost you at least $500 to $1,000 a year. To get proper insurance coverage at the best rates possible, follow these five suggestions.

• Increase Your Deductible

The rule of thumb with insurance of any kind is that the higher your deductible, the lower your premiums. By increasing your deductible from $250 to $500, or from $500 to $1,000, you can typically shave 10% off your homeowner’s insurance premiums. A higher deductible means that you won’t be able to make smaller claims with your insurer, say if a window gets broken or a pipe leak causes modest damage. The upside, though, is that you’ll keep your rates low with a squeaky-clean claims record.

• Buy Smoke Alarms

Purchasing a smoke alarm isn’t just a smart thing to do to keep your family safe. It’s also a low-cost way to save money on your insurance. Smoke alarms are cheap, just $10 or $20, but these lifesaving devices can slash another 10% from your annual insurance costs.

• Install a Security System

By putting in a burglar alarm in your house, especially one that’s linked to your local police station, you can cut your insurance costs by roughly 5% to 10%. To get this discount, send a copy of the bill for your burglar alarm or proof of your security system contract to your insurer.

• Ask for a Multiple-Policy Discount

If you have auto insurance or health insurance with one particular insurer, it might pay to place all your insurance coverage with that company. Ask your insurer about a multiple-policy discount, which is given to consumers who give all their insurance needs to one insurer. The upshot is that you might also get a multiple-policy discount on your auto and health insurance too, saving valuable dollars on that coverage, as well.

• Comparison Shop Annually

Experts recommend that you review your homeowners insurance regularly to make sure your current coverage adequately meets your needs. Mark a date on your calendar to do a once-a-year policy review. When you perform your annual insurance checkup, make sure you comparison shop to see if you can get better rates elsewhere. Insurers eager to win over new business may offer good deals to new customers. It’s fast and easy to compare insurance rates online at sites like http://www.insurance.com or http://www.insure.com. Whatever company you choose, protect yourself by only buying a policy that offers Guaranteed Replacement Value insurance. This means that if disaster strikes and your home gets completely destroyed, the insurance company will pay you the full current market value for your home, not just what you paid for your house.

4. Maintain Your Home in the Best Possible Condition

Have you ever driven through an older, established community and seen homes in disrepair? You know what I’m talking about: those nice big, but shabby-looking homes you can find in practically any working-class or middle-class community in America. Maybe the porch has gotten dilapidated or the forty-year-old roof needs replacing. Perhaps a home is in desperate need of a paint job or even just a decent trim of those overgrown hedges and a good mowing of the front yard, which resembles a mini forest.

Viewing the outside of some of these residences, you can just imagine how they must have looked in their prime. They were probably elegant and stately, with well-manicured lawns and eye-catching exteriors. Unfortunately, these homes are now anything but eye-catching. In fact the word “eyesore” is far more appropriate.

What happened? In some cases, homes were passed along from one generation to the next and the recipients of the houses were unable to afford proper upkeep. At other times, properties fell into disarray after their owners experienced a host of personal problems, ranging from job loss to divorce to illness. In certain instances, property owners simply neglected their homes, allowing them to look more like caves than castles.

If you want your home to truly be your castle, you must treat it with the tender loving care it deserves. The payoffs for doing so are enormous. Not only will you enjoy living in the home, but you’ll also maintain or increase the value of the house, as well as give yourself more financial options if you ever need to sell or tap into the equity in your home.

Believe it or not, many of the people caught up in the foreclosure wave right now have shot themselves in the foot because they haven’t properly maintained their homes. Some unsuspecting homeowners, when faced with financial difficulties, mistakenly thought they would be able to sell or refinance their homes; however, when appraisers and inspectors visit a home, all sorts of problems, such as a leaky roof, broken windows, or electrical problems, can derail a deal in no time flat.

You can avoid a lot of headaches and financial problems by regularly tending to your property and giving it routine care. Think “pick up, clean up, and repair.” Start by getting into the habit of walking around the perimeter of your property at least once a week. We all have a tendency to enter or exit our homes the same way. Sometimes we leave by the front door; however, many people, especially those who own single-family detached homes, frequently leave their houses in their cars, exiting from a garage. By doing so, you can miss issues large and small. Is there a rusty soda can that the wind blew onto your side lawn? Did the neighbor’s garbage or recycling spill over onto your property? It might be someone else’s trash, but it’s your problem. Minimize unwanted junk and other miscellaneous objects outside your house by picking up things outdoors regularly.

I’m not asking you to go overboard. No need to turn into the town trash collector; however, at the very least you should do your part to keep the outside of your house looking decent and orderly. If you happen to walk by a neighbor’s property and something is lying on the ground that shouldn’t be there, it wouldn’t hurt you to pick that up. You’ll be beautifying the community, and who knows? Your neighbor might one day return the favor.

As you survey your property, remember that outside issues can trickle indoors if problems aren’t addressed. Keep your gutters clear of leaves, so you don’t have interior leak problems. Also, small nuisance issues left unattended can turn into big, costly headaches. For example, that toilet leak which goes drip-drip-drip every day can ultimately cause your bathroom floor to buckle or form mold or rust problems. Take care of minor defects as soon as you notice them. Think of your home as you would your automobile. Every moving part needs some kind of attention at some point or another. If your doors squeak, lubricate them. If your window screens are tattered or ripped, replace them.

Power washing is a great way to beautify any patio, walkway, entrance, front door, or exterior. If your house is vinyl sided or brick faced, chances are you can power wash. You can rent a power washer from a home improvement store such as The Home Depot or hire an expert to do it for you for just a few hundred dollars.

5. Properly Manage the Equity in Your House

I’ve already explained how the equity in your house represents a source of personal wealth. It’s an asset you don’t want to squander, for any reasons. To avoid that misstep, it’s vital to understand how to properly manage your home equity and make sure it continues to grow.

There are three primary ways that the equity in your house builds: by paying down the principal owed on your mortgage, through natural market appreciation, and by making property improvements that increase the value of your house. As a homeowner you have no control over whether the real estate market goes up or down, but you can bolster home equity by reducing your mortgage balance and making smart choices about home improvements.

Let’s start with the strategy over which you have the most control: the rate at which you pay down your mortgage. Under normal circumstances, you make a monthly payment to your lender, and little by little your outstanding principal balance dwindles. I say “little by little” because during the early years of your mortgage most of the monthly payments you make are applied toward interest. For instance, after ten years of paying on a thirty-year mortgage, you’re likely to have knocked off just 13% to 17% of your principal balance. Once you get into the eighteenth or nineteenth year of your mortgage, that’s when you start making headway on your loan. It’s at that point when you’ll discover that more than half of your payment gets credited toward reducing your outstanding principal. This is typical for a loan that amortizes over thirty years.

What if you wanted to accelerate your loan payoff? You could do so in any number of ways. You can send your lender additional money each month, in any amount of your choosing, and write a note to your lender specifying that you want those funds applied to your principal balance. You can also remit one extra full payment on your mortgage each year to hasten your mortgage payoff. Both are powerful strategies that more rapidly reduce your mortgage debt and save you tens of thousands of dollars in interest charges. Assume you took out a $400,000, thirty-year loan for a home at an interest rate of 7%. Your monthly payment for principal and interest would be $2,661. By adding an extra $300 a month to your payment, you can pay off your mortgage in just twenty-two years and four months. You’d save an incredible $168,392 in finance charges. Similarly, by making one extra payment of $2,661 each year, you would be mortgage-free after twenty-three years and ten months and would save $134,177 in interest. Equally important, both scenarios allow you to dramatically increase the equity in your home.

As a homeowner, especially one who has a good deal of equity in your home, you need to be prepared for the onslaught of offers you’re likely to get from lenders of all stripes. All kinds of banks and financial institutions will flood your mailbox with loan offers, each of which will encourage you to tap into the equity in your house. You’ll find these offers particularly plentiful when home prices are rising. Some lenders will want you to refinance your house. Others will suggest you take out a home equity loan or home equity line of credit. If you agree to any of these offers, realize that those loans are secured by the value of your home. Thus, any additional mortgage debt you acquire diminishes the value of your home equity. I don’t mean to suggest that you should never refinance your house or take a loan against it. One the contrary, both refinancing and home-equity loans can be prudent strategies, when done carefully and for the right reasons.

Home equity loans appeal to property owners for several reasons. First, they’re fairly easy to come by, because your house is collateral for the loan. Additionally, the interest on home equity loans is generally tax deductible up to $100,000. Moreover, the interest rates you pay on home equity loans and lines of credit are typically lower than other consumer loans. Lastly, you could use the money for any purpose you want, such as making home improvements or paying off high-rate credit-card debt.

Despite all these attractive features, you must take care in both applying for and using a home equity line of credit. For starters, you don’t want to use your home as a piggy bank, tapping your equity for the wrong reasons, like to pay for vacations, cars, holiday spending, and the like. Resist the temptation to borrow more than you can afford or more than you really need. If you’ve ever been seduced into spending money on a credit card with a high credit card limit, think of how you will deal with the temptation of having a big home equity loan or line of credit at your disposal.

What Nobody Tells You about Home Equity Loans

Speaking of credit cards, did you know that a home equity line of credit operates very much like a credit card? Both of them have a preset limit and each allows you to access your credit by simply drawing on your credit line. With a home equity line of credit, you access your available funds by writing a check or using a card that your lender provides. You make payments each month based only on the amount of credit you’ve used.

A home equity loan works differently. You receive a lump sum to spend on what you’d like. Because you receive the money up front, you have to start repaying the entire loan balance back immediately. Therefore, you could have a $100,000 home equity line of credit, spend just $15,000 from that credit line, and make principal and interest repayments based on those $15,000 worth of charges. With a $100,000 home equity loan, all the funds are immediately disbursed to you, and your repayment is based on the full amount of your loan.

Most bankers will tout the tremendous benefits of home equity lines, and indeed, it can be advantageous to be able to pull cash out of the value of your house. Relatively few lenders, however, will seriously warn you about the pitfalls of home equity loans or the dangers of unnecessarily or unwisely draining your home’s equity.

What are the downsides to these loans? For starters, they’re not like unsecured credit cards. With unsecured credit cards, if you don’t pay, creditors have fairly limited recourse against you. With a home loan, your house is on the line, so if you don’t repay an equity loan or line of credit, you could lose your biggest asset and the roof over your head.

Home equity lines of credit also frequently carry variable interest rates. This means what starts out as a manageable payment could quickly rise if you’re not careful.

Additionally, home equity loans aren’t always the best way to borrow. In certain instances it might make better sense to use other forms of financing. For example, if you’re thinking about using a home equity loan to pay for college expenses, you should instead explore traditional student loans. They might have lower rates, and the interest on many college loans is tax-deductible as well. Moreover, when you or your child secure federal student loans, like a Stafford Loan or a Perkins Loan, these are often subsidized, meaning the government pays the interest on the loans while the student attends school. Some student loans don’t come due until the student graduates, too, whereas a home equity loan requires that you start repaying the loan immediately, usually within one month.

Another point of note: while the government uses tax benefits to stimulate home ownership, Uncle Sam’s generosity for property owners goes only so far. That equity loan or line of credit you take out will be tax deductible only up to a maximum of $100,000.

Lastly, home equity loans can sometimes give you a false sense of security, making you feel a bit richer than you are and leading you to make unwise spending choices or even extravagant purchases. Lenders know that many consumers use their home equity as a ready source of cash. As a result, some unscrupulous lenders might try to take advantage of you by charging ridiculously high interest rates or excessive points and fees in connection with a home equity loan. For these reasons, think long and hard before you open an equity line of credit or take out a loan secured by your home.

The good news is that federal laws do offer some protection to prevent homeowners from being abused when they take out home equity loans. First, the Home Owners Equity Protection (HOEP) Act prevents fraud and predatory lending by banning the following on home equity loans for owner-occupied properties:

• An annual percentage rate (APR) that is more than ten percentage points higher than the yield on Treasury securities with similar maturities (i.e. the APR on a fifteen-year or thirty-year home equity loan gets compared with the yield on a fifteen-year or thirty-year Treasury bond, respectively)

• Total fees and points in excess of 8% of the loan amount

• Prepayment penalties after the first five years of the loan

• Balloon payments of less than five years with negative amortization

• Any terms that make it impossible for homeowners to cure a loan default

The HOEP Act applies only to home equity loans, not equity lines of credit, because the latter are not considered closed-end loans. Additionally, if you ever take out a home equity loan and you soon have a change of heart, you can terminate the deal. The Truth in Lending Act gives you a three-day right of rescission, allowing you to cancel a home equity loan for any reason within 72 hours (excluding Sundays) after you sign a loan agreement. If you cancel a home equity loan during this three-day period, your lender must refund any closing costs you’ve paid and within twenty days remove any liens placed on your property.

I’m often asked if it makes sense to use a home equity loan to pay off high-rate credit card debt. My answer is yes, if two specific conditions are met. First, you have to identify how you got into a mess with credit card bills. If you racked up credit card bills because you fell victim to one of the Dreaded D’s–Divorce, Downsizing, a Death in the family, Disability, or Disease–then you should consider using a home equity loan to pay off those credit card bills. If, on the other hand, you simply have a shopping addiction or lack proper money management skills, I don’t recommend taking out a home equity loan to pay off credit cards. In such instances, people usually end up with far more mortgage debt and go out and run up the credit cards all over again. The second condition for using home equity to reduce credit card debt is this: has the problem that caused your debt been fixed? Even if you got into debt through no fault of your own, because of a downsizing or marital separation, the fact remains that it’s a bad idea to put your home at risk if those issues haven’t been resolved. If you’ve got a new job, have financially rebounded from a divorce, or have beaten a disease or disability that previously left you unable to pay your bills, that is a different story. In these instances, by all means, get caught up on your debts by paying off those credit card bills with low-rate, tax-deductible mortgage debt.

Do’s and Don’ts When Refinancing Your Home

After owning your home for some time, you might start to consider whether or not you should refinance your mortgage. If interest rates have dropped considerably, or if your credit has improved dramatically, it’s possible you might be able to get a much better deal on a new mortgage than your original loan. Before you commit to refinancing, however, make sure you realize the implications of doing so.

To begin with, refinancing can eat away at your home equity because refinancing is not free. Refinancing entails paying off your old loan and replacing it with a new one, and banks aren’t in the business of making loans free of charge. Even if you hear lenders talk about a so-called “no cost” refinancing, don’t believe it. A lender might not have an application fee or charge you points to refinance, but those costs and others associated with refinancing are essentially priced into a loan with a higher interest rate. As you’ve heard many times before, “There’s no such thing as a free lunch.”

You probably remember that points you pay to obtain a mortgage are tax deductible. When you refinance, however, any points you pay must be amortized over the life of the loan. In other words, you can’t take the full deduction for the points in one year, as you can do when you buy a house.

As with a home equity loan, you should never refinance into a larger loan than is necessary. Unfortunately, scores of homeowners do it all the time when they sign on the dotted line for a “cash out” refinance, which allows you not only to get a better rate or more favorable loan terms, but also get some dollars back in the deal. A cash-out refinancing saps equity from your home, so you should take that money only if you plan to use the proceeds wisely. Guard against frequent refinancing, too. If rates drop a half point or even a full percentage point, do the math to figure out if the monthly savings you can generate will really outweigh the closing costs and other fees associated with a refinance. I can’t help wondering if many consumers are cheating themselves out of the opportunity to build wealth by refinancing excessively.

Consider these facts: Nearly nine out of ten consumers who refinance their home loans take cash out in the transaction. In 2006 alone, Americans cashed out $352 billion worth of home equity, more than a ten-fold increase in the amount cashed in the year 2000. Moreover, when the Joint Center for Housing Studies (JCHS) at Harvard released its annual survey of housing, the State of the Nation’s Housing 2007, the results were especially sobering. The JCHS report indicated that 13% of individuals and families who bought homes in 2003 and 2004 already have negative equity in their homes. Their outstanding mortgage debt exceeds the market value of the houses in question. Unfortunately, the news is even worse for more recent buyers. A November 2007 survey by Zillow found that nearly 16% of homebuyers who purchased houses in 2006 had negative equity, as did 17.5% of those who bought in 2005. The number of homeowners facing negative equity will no doubt rise considerably if real estate prices remain soft in 2008 and 2009, as many experts predict.

As with all financial products, you should shop around for the best loan terms you can get in the event you decide to refinance your mortgage. Don’t accept the first offer that comes your way. In considering a refinancing, follow the same vigilant standards you used to evaluate lenders and their offerings when you bought your house. You should know the annual percentage rate on your new loan, all fees charged, and key payment terms, such as whether a prepayment penalty exists.

Don’t ever sign any loan documents you don’t understand, and don’t agree if any loan officer or mortgage broker asks you to put your signature on a blank document with the promise that he or she will fill it in later. You don’t know what could be inserted into those loan documents. Also, make sure you get copies of everything in connection with a new mortgage, including a Good Faith Estimate, a Truth in Lending form, and the mortgage, note, and/or promissory document you must sign.

6. Increase the Rate of Appreciation on Your Property

As a homeowner, it can be either terribly frustrating or wildly exhilarating to sit on the sidelines and watch the value of your property change. Obviously, if you’re living through a down market where real estate prices are dropping, that’s probably the time you’ll be frustrated, or at the very least mildly disappointed that your home value is declining. On the other hand, in boom real estate cycles, you can pretty much ride the wave and watch your home appreciate in value because of natural market forces. This situation typically occurs when the economy is strong, housing demand outstrips supply, interest rates are attractive, and borrowers can readily obtain mortgages from lenders. While you can’t single-handedly influence any of these factors, it doesn’t mean you can’t push up the value of your home, increasing your equity in the property.

One major factor within your control as a homeowner is the extent to which you renovate or improve your house, boosting its market value and making your house far more valuable than you might imagine. Not all home improvements are created equally. Be strategic about your efforts if you want to make home improvements that will add value to your house, as opposed to simply making it more cosmetically appealing.

Home Improvements That Pay Off

The key question to ask is whether the improvement will significantly increase your home’s resale value. If the answer is yes, chances are it’s an item worth considering. Remodeling a kitchen, upgrading or adding a bath, or constructing a new bedroom all rank as high-return investments in your home. Lower-return improvements include finishing a basement or adding structures, such as a shed, swimming pool, or extra garage.

If you take out a loan for home improvements, you can deduct the interest on the loan if the work is considered a capital improvement. The IRS says capital improvements are anything that prolongs the life of your house, increases its value, or makes it suitable for new uses, such as adding a porch or driveway or installing new, built-in appliances. Always keep good records of your home improvements. You can’t immediately get a tax write-off for these upgrades, but when you sell your house those improvements will increase your basis, or tax cost, in the property, which could lower any taxes you might have to pay.

Whether you decide to add a room, put in storm windows and doors, pay for professional landscaping, or install an air conditioning system, fireplace, or fence around your property, each of these actions can increase the tax basis in your home. What’s more, if an appraiser, home inspector, or real estate agent came out to evaluate your house, these upgrades would also undoubtedly immediately boost your home’s value. Some people do massive upgrades right before they plan to put their homes on the market, but you should resist the urge to over-improve your house. You don’t want to buy into a neighborhood of 2,000-square-foot, three-bedroom homes and convert your house into a 4,000-square foot, five-bedroom McMansion in the hopes that you’ll double the value of your property. It won’t happen. Besides, as a homeowner, any improvements you make shouldn’t be driven exclusively by financial considerations and possible resale value. You should also personally enjoy the home improvements you make. After all, the ability to change or upgrade your house–and still be able to afford and sustain it–is both a right and responsibility of successful home ownership.

7. Take Advantage of Financial Planning and Tax Strategies

Five Tax Benefits for Homebuyers

As a homeowner, you are entitled to a remarkable number of tax and financial benefits that don’t exist for renters. To take advantage of these economic perks, you must first know that they exist. Here’s a quick summary of the benefits Uncle Sam offers homeowners like you.

• Mortgage interest deduction

If you’re married, you get to deduct all the interest you pay up to one million dollars on your mortgage for a first or second home. The deduction is $500,000 for single people or married taxpayers filing separately.

• Mortgage points

Any points you paid in connection with your home loan are tax deductible. Remember: a point is 1% of the value of your mortgage. This deduction can be a tax savings worth thousands.

• Property taxes

Any city or county property taxes you pay can be deducted from your income taxes, with the exception of tax money set aside in an escrow account, which can be deducted only when it’s paid.

• Moving costs

If you moved because of a job relocation, you could be entitled to write off some of your moving costs. Certain requirements must be met: For instance, your move must have occurred within one year of starting your new job. Also, your new job must be at least fifty miles farther from your old residence than your old job was.

• Mortgage tax credit

Low income, first-time homebuyers can qualify for a home-buying tax credit and get a mortgage interest tax credit up to 20% of the mortgage interest payments made on a house. You get to keep using this credit each year that you live in a home purchase with a tax credit certificate.

Estate Planning Tips for Homeowners

A handful of more general financial planning and estate planning strategies can also put you in good stead as a homeowner. Use the techniques recommended below to keep your finances in tiptop shape and save on taxes too.

• Create a Will

If you die without a will, it’s called dying “intestate.” This bad situation could cause your family members to fight over your home or other assets. Take the time to create a simple last will and testament, which is the basic foundation for a solid estate plan. Your will can spell out to whom you would like to leave various assets, as well as who should be responsible for any minor children you have. Get a lawyer who specializes in wills and trusts to draw up a will for you. If you can’t afford a lawyer, use an online service, such as Buildawill.com or Legalzoom.com. After you create a will online, just make sure you get it properly notarized and signed by at least two witnesses.

• Buy a Good Life Insurance Policy

In the event of your death, life insurance will cushion the economic blow to your spouse, children, or anyone else who relies on you financially. Term life insurance is very affordable, on the order of $30 to $50 a month for a $500,000 policy for most nonsmokers. Buying life insurance will give you peace of mind that if something happens to you, your heirs will be able to use the proceeds from your life insurance policy to pay off your mortgage and keep the house.

• Establish a Basic Estate Plan

It may seem premature right now, but if the value of your house really grows, you purchase a lot of life insurance, or you build up considerable wealth outside of your home, you’ll be doing yourself a favor to consult with a financial planner or tax adviser about smart ways to reduce the impact of estate taxes on your home. Currently, through 2008, you can transfer up to $2 million to your heirs, tax free. Federal estate taxes are slated to expire in 2010 and then be reinstated in 2011, so a qualified professional can help you stay abreast of the law and take the proper financial steps. One step might involve setting up something called a House Trust. In IRS lingo, it’s known as a Qualified Personal Residence Trust, or QPRT, typically done when your most valuable asset is your home. You set up a trust that allows you to pass along your home–or even a vacation property–on a tax-free basis to your children. The goal is to substantially reduce estate taxes, which can claim as much as 47% of your assets. Setting up such a trust is complicated and must be done in accordance with IRS laws. It isn’t something you can do on your own. When properly handled, though, a QPRT can save your heirs hundreds of thousands of dollars in estate taxes.

For more general information as well as general tax guidance, get IRS publication 530, Tax Information for First-Time Homeowners (http://www.irs.gov).

Lynnette Khalfani-Cox, The Money Coach, is a New York Times bestselling author, speaker, and television personality. To learn more about Lynnette or to sign up for her free personal finance newsletter, visit her Web site at http://www.TheMoneyCoach.net

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