You receive regular reports, monthly or at the end of the year, on the status of the escrow account, which is, after all, your own money. At regular intervals, usually yearly, the account will be analyzed and your payment adjusted up or down, depending on whether the account shows a surplus or deficit.

This adjustment can be a surprise to the homeowner with a fixed-interest mortgage, who expected monthly payments to remain at exactly the same amount for the full term of the loan. It is, of course, taxes and insurance costs that change, not the underlying principal and interest portion of the payment.

About insurance

The mortgagee (lender) will require that you keep what is known as hazard insurance (fire and similar risks) on the property in an amount sufficient to cover the loan. As a prudent homeowner, you will want wider coverage, and for a larger amount.

Rebuilding after a fire, even partially, can sometimes cost more than your original purchase price. And you need personal protection for risks that don't concern your lender - liability for a guest who is hurt on your property, for example.

Your best bet is a homeowner's policy, which puts many kinds of insurance together in a package. The least expensive, called basic or HO (homeowners)-1, covers fire, windstorm, explosion, smoke, glass breakage and other perils including two very important ones: theft and vandalism.

More expensive is the broad form, HO-2, which adds several more items, largely connected with plumbing, heating and electrical systems. Comprehensive insurance (all-risk) covers even more items and is considered a luxury item. HO-6 is used for condominiums and cooperatives. State regulations dictate the specific coverage in the various policies.

Besides asking what is covered by the policy you buy, it's important to find out what is not covered (earthquake, floods, pop bottles dropped from airplanes). If you have a valuable collection or expensive jewelry, you may need to pay an additional premium for riders covering those items.

An insurance agent may represent one company, or may be an independent broker who places your policy with any one of several companies. Most important, perhaps, is that the agent be able to explain things so that you understand exactly what kind of protection you are buying.

Replacement vs.

depreciated value

Suppose your 10-year-old roof is damaged by fire so badly that it must be completely rebuilt.

How much is it fair for the insurance company to pay you? You now have a brand-new roof instead of the old one, which was half-way through its useful life. It could be argued that you are entitled to only half the cost of a roof.

On the other hand, you couldn't buy a half-used roof; you had to spend the money for a completely new one. Through no fault of your own, you had an expense you hadn't counted on.

So it's important to inquire whether your policy will pay full replacement costs, which should be your goal. Sometimes it depends on the dollar amount of your coverage; sometimes an inexpensive rider ensures replacement value.

One way to economize on insurance cost is to opt for a larger deductible. This is the portion of your loss you agree to pay yourself. You wouldn't want the bother of filing claims for $50 losses in any event, and you're not buying insurance as a moneymaking proposition. Agreeing to handle a larger amount of any loss on your own can cut your premiums considerably.

About taxes

In some areas, property taxes remain the same when ownership of a house is transferred, and you can be sure that the tax bill the seller received last year will be the one you receive next year, except for any community-wide increases. In other areas, the assessment (valuation of the house for tax purposes) changes to reflect your purchase price. Next year's taxes would be based on that figure. It's a simple matter to inquire which system is followed in the areas you are considering.

Make sure you know the true tax figure on any house you are considering buying.

If you are considering a brand-new house, remember that present taxes are probably based on the value of the vacant lot; the exact amount you will be paying may or may not be established at the time you buy.

Other costs

Ask the sellers about their utility and fuel bills for the past year, or better yet, for two years back.

Some authorities recommend setting aside 2 percent or 3 percent of the purchase price for annual maintenance. It's impossible, of course, to set any rule, because the age and present condition of houses vary so widely.

Include in your calculation of monthly costs the price of basic telephone service and, for most households, cable TV; those figures may vary from one locality to another. Compare costs on homes you may be considering.

Repairs vs.

improvements

Improvements are just that - permanent additions that increase the value of your home. Every homeowner should keep a permanent file detailing all expenses for improvements, including bills, checks and receipts. The Internal Revenue Service considers your cost basis for the house to include not only original purchase price, but also money spent on improvements.

Repairs and redecorating are not considered improvements. Patching the roof is a repair; installing a new one counts as an improvement. Repainting your living room doesn't count; painting a new wing does. Other improvements include fences, driveway paving, new furnace, new wiring, wall-to-wall carpeting, finishing a basement and adding new rooms or bathrooms.

Risk of over-improving

Few improvements increase the resale value of your property by the amount you spend on them; buyers may like the idea of a finished basement, but may not be ready to pay anything extra for it. Depending on the location of the property and neighborhood price levels and expectations, an in-ground swimming pool may add value, or may actually be a detriment when time comes to sell. Make improvements for your own satisfaction, not necessarily as investments.

As a rule of thumb, it is financially unwise to over-improve a house beyond its neighbors. When you come to sell such a house, it's almost impossible to recoup your investment. A given street will support only a given price range; after that, buyers with more to spend want to live on a more prestigious street. As you house-hunt, keep in mind that any planning for alterations and additions is risky if it will make yours the most expensive house on the street.

On the other hand, you may pick up a bargain from owners who have put too much money into their home and can't get it out.

(Distributed by Los Angeles Times Syndicate)

Tomorrow: What sort of home to buy?

From the book ``The Complete Homebuyer's Kit'' by Edith Lank, Copyright (c) 1989, Longman Group U.S.A. Inc. Reprinted by permission of the publisher, Longman Group U.S.A., Inc.