For sake of argument, let's assume that you won't be paying any PMI. Now, let's compare two neighbors, with identical houses, who have same monthly payments on thirty year mortgages. The first neighbor has a $100,000 mortgage at 10% interest, second has a $146,000 mortgage at 6%. You may think this is extreme, but I can tell you that this is what has happened in my neighborhood over last 5-7 years. The type of house I'm living in retailed for under $100,000 in 1999, and retails now in $130,000's.

Back to our example. Both of our neighbors are paying about $875 per month on their mortgage. Now let’s suppose that both of them decide to pay extra on their mortgages, upping their payments to $1,100 per month. Both neighbors are reducing their principal balances by $225 more per month, and here’s where first neighbor has advantage. The balance on $100,000 mortgage goes down much quicker than $146,000 mortgage, such that while first neighbor is paying more in interest every month than second neighbor, by sometime in seventh year, neighbor one is actually paying less in total interest. Neighbor one will pay his house off in a little over 14 years, while neighbor two will take about 18 years to pay off.

In this example, we don’t even take into account possibility that neighbor one could refinance balance on his mortgage when interest rates decline. This would lower his required payment, and allow him to pay off his house even faster. In meantime, “market value” of his house has risen to about what neighbor two paid ($146,000). When neighbor one decides to sell his house, he’ll walk away with a lot more cash.

Obviously, this is a simplified example, but one that has been occurring over and over again in last few years. I know that it’s expensive right now to buy a house, no matter where you go. What do you do in this situation? I recommend looking for, and buying, a home that needs some work. You should look for houses that are selling at about 80% of average market value in a neighborhood. These houses will generally need only cosmetic work, and maybe a few minor repairs, but you’ll save on price of house and have extra equity right off bat. Stay away from houses that need plumbing or electrical work, unless you know someone that will fix it for free. Those fixes cost big bucks, and will eat up much of savings on price of house.

Buy house, make cosmetic changes, then have it re-appraised. You’ll be surprised at how much “value” of house has gone up. (I put value in quotes because only real way to judge value of a house is to sell it. An appraisal is simply an estimate of value.) This will also help you get rid of PMI, if you didn’t have 20% downpayment, because once balance of your mortgage falls below 80% of your appraised value, you can petition to get rid of PMI. Houses can be investments, and like any investment it takes a work to find good value. But it can be done.

Chris Mallon is the editor and publisher of the Undervalued Weekly, a free personal finance and investment newsletter, published every Saturday.

A good Management Discussion and Analysis will give you details you need to understand items on income statement. You should get segmented sales data, cost drivers, etc. in this section. If you can’t make sense of MD&A, that should set off alarm bells in your head. If you don’t find information you need in MD&A, you should…

4. Look at Notes to Consolidated Financial Statements (Footnotes)

The footnotes tend to be more difficult to understand than MD&A, but you get really detailed information here. The footnotes are where management hides dirty laundry. And when you’ve got guys making today’s corporate salaries that laundry pile can get pretty big. Here’s where you’ll likely find what you couldn’t in MD&A, it’s just that in notes you may have to do some putting of two and two together.

Take your time sifting through this section, and try to identify income statement items that relate to footnotes you’re reading. You can do it other way around, as well, and look for footnotes that relate to income statement item.

If you still can’t figure out what company is doing, after going through MD&A and footnotes, you may want to consider looking at another company. This one may be too complicated (or too devious) for your abilities. Don’t feel bad about not understanding business, either. Even great Warren Buffett admits that he doesn’t understand some businesses, and he never lets his ego run away from him. If he can’t understand it, he won’t invest in it. I recommend you do same thing.

5. Look at segmented data

I always like to look at segmented sales and profit figures to determine which product lines, or operating businesses, are growing sales faster than others. This information is usually in MD&A. If you can, try to find operating profit for each business segment as well. Then look at profit margins for each segment of business.

You may be surprised at different profitability levels of each business segment. Compare segment with fastest growing sales versus segment with highest operating profit. If these are same segment, that’s good news. If they aren’t, that’s okay too.

You do want to watch out for companies that have lowest operating profit in their fastest growing segment. This could cause a decline in company’s overall profitability as sales grow faster than profits. For example, a segment that’s growing 5% a year, but has a 10% margin, will contribute more to total operating profit growth than a segment growing at 20% a year with a 1% margin.

I hope you find these tips helpful. Of course, there are plenty of other analysis tools that you can use to evaluate financial statements. It's important that you keep looking for more and better ways to analyze company data, because constant learning will make you a consistently better investor.

Chris Mallon is the editor and publisher of the Undervalued Weekly, a free personal finance and investment newsletter, published every Saturday.