Even though the stock market is headed up, everyone seems focused on buying and selling homes.

Dear Ilyce: We are selling our first home and purchasing a brand new home. When we close on our sale, we expect to have a profit of $50,000. The new home costs $161,000. We have no debt except for 2 car payments totaling $800 per month and our current mortgage, which costs $686 per month. We plan to stay in this new house for about 7 years. How much money would you put down on the new house and what type of loan would you get?

Gary, congratulations on pocketing a fairly significant chunk of change on this real estate deal. The trick now is to make that $50,000 work harder for you.

I’d start by putting 20 percent down on your new house, or $32,000 so you can avoid paying private mortgage insurance. Next, take $8,000 and put it aside to be your emergency cash reserve. This is money that you use just in case something perfectly awful happens, like, you lose your job. It’s not vacation money or Christmas club money, so put it somewhere where you won’t be tempted to dig into it. Use what’s left to pay down at least one of your car loans, preferably the one with the higher interest rate.

As far as the mortgage goes, you might want to consider getting a 7/1 adjustable rate mortgage rather than a 30-year fixed rate loan. The interest rate is fixed for 7 years and it’s about 4.25 percent versus 5.18 percent for a 30-year fixed rate loan. If you follow my advice, your monthly payment will be just $634, about $50 less than what you’re paying now, or $70 less than what it would be if you went with a standard 30-year fixed rate mortgage.

Since you’ll have paid off one car loan, you’ll find you’ll have about $6,000 a year in extra cash floating around your home – enough to fund two Roth IRA accounts.

Dear Ilyce: Could you give me some general guidelines on purchasing a house that I am currently renting? Do I need a real estate agent? Do I need a real estate lawyer? Do I need a home inspection? What items or steps do I need to follow?

Fred, the first thing you have to figure out is if your landlord is willing to sell you the property. And if so, how much he or she wants for it.

If your landlord has asked you to come up with a fair price, you’ll need to spend some time with a local real estate agent, visiting open houses in the area and trying to establish a value for your rental house.

As far as doing a home inspection, I always think it’s a good idea to check out a house from top to bottom, even if you’re already living there. If nothing else, the home inspector can give you a good idea of any problems there may be with the property down the line, so you can start saving for the maintenance bills that come along with homeownership.

You probably don’t need a real estate agent to buy this house. But you will need a real estate attorney. To find one contact the Chicago Bar Assocation and ask for the head of the real estate committee. This individual should be a competent real estate attorney who can give you some referrals to find an attorney who will handle the negotiation and closing for a fixed fee.

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March 9, 2004