Before you get too far in the home-buying process, make sure you really want to own a home. We'll begin by reviewing the general advantages and disadvantages of home ownership. Then think about your own personal pros and cons.

Advantages

Millions of people enjoy the rewards of home ownership. Here are the advantages of buying a home. Think about the ones that are most important to you.

A sound investment. When you carefully choose a home you can afford, the payoff can be great. Each month when you make your mortgage payment, you're building equity in a place of your own. Equity is the portion of the property that you actually own through your payments, versus the portion that you still owe the mortgage lender. The longer you stay in your home-and the more mortgage payment you make-the more equity you'll have. And unlike most things you buy, a home can actually appreciate, or increase in value, as time passes, building more equity. (Remember: there's no guarantee that your home's value will grow; sometimes home values go down.)

Tax advantages. The mortgage interest and real estate taxes you pay are tax deductible, which allows you to deduct part of your housing-related expenses from your taxable income. That can reduce your tax bill.

A first step. As you build up equity in your current home, it's usually easier to afford another home in the future.

Satisfaction and security. As a home owner, you can decorate and improve your home any way you like. Owning a home can also give you a new sense of pride in your surroundings. You and your family may feel stronger ties to your community.

Disadvantages

It's easy to get caught up in the excitement of buying a home, and to forget that home ownership may have drawbacks. Here are some disadvantages of owning a home. Think about which ones may apply to you.

Bigger costs. If you're now renting, you can expect to pay more per month for your mortgage, plus the added costs of home repairs and maintenance.

Tying up cash. Your home might increase in value as time goes by, but don't count on getting a big return quickly. During the first few years of ownership, you're likely to lose more money than you gain if you should need to sell your home, because your home may not appreciate enough to cover the 5% to 7% that usually goes to the real estate agent.

Tougher moves. After you've bought a home, you may not have as much flexibility in choosing a new location or job.

No guarantees. There's no guarantee that your home will increase in value, particularly during the first few years.

Home ownership isn't for everyone, so you should think carefully about the advantages and disadvantages before signing an agreement to buy.

Tax Planning

Tax benefits are just one more advantage to owning your home instead of renting. The federal and most state governments have actively promoted home ownership by providing homeowners with tax benefits that aren't available to renters. Here are some of those benefits:

Income tax deductions

The federal government allows most tax payers to deduct money from their taxable income, either through a standard deduction amount or itemized expenses. Most states also permit these deductions.

In the past you may have taken the standard deduction rather than itemizing your deductions on your federal income tax returns. You may have been using the 1040EZ short form to complete your income taxes.

But now that you're a homeowner, you may want to start using the 1040 "long form" to deduct some housing-related expenses from your taxable income-and probably reduce your tax bill. Deductible expenses include interest on your mortgage and state or local property taxes.

Interest

Each month, your mortgage loan payment is divided into principal and interest. And each month the portion going toward principal increases. In the early years of your mortgage loan, most of your mortgage payment goes toward interest. So your interest deductions will be much larger in the early years of your loan than toward the end.

At the end of each year, your mortgage loan company will provide you with a statement showing the total amount of interest you paid for the year. That's the information you'll need to claim the mortgage interest expense on your federal tax return.

In your first year as a homeowner, you may also get an extra tax break if you paid any "discount points" to the lender to get your mortgage loan, since these discount points may be counted as interest paid for tax purposes. Be sure to consult with the Internal Revenue Service or a professional tax advisor.

Keeping records

Do not throw away any documents that you receive at closing. You never know when you may need them. Keep a file on all your home-buying documents.

Generally, when you sell something for more than you paid for it, you must pay a "capital gains" tax on the increase. When you sell your principal residence, there are some exclusions to the capital gains tax that may apply. You will want to fit into those exclusions whenever possible and you will need to keep good records. For example, by adding the cost of any home improvements to your original purchase price, you reduce your taxable profit if you later sell your home. So, you should keep careful records of any improvements you make on your house. That can reduce or eliminate taxes if you sell your house for more than you paid for it. You may also be able to add some of the closing costs from your purchase to your home's basis when you sell, so don't throw your settlement statement away.