The Benefits of Home Ownership

Owning a home is a part of everyone's "American Dream." Besides providing much more space for your family, and a garage for your car(s), owning a home also has significant financial benefit: the mortgage interest is tax deductible. At the beginning, most of your monthly payment (80% or more) goes to the interest (as opposed to your mortgage principal), which means most of your mortgage payment is tax deductible. As a matter of fact, this tax policy is intended to help people become home owners.

Buying a house can also be a good investment. House prices can go up faster then the stock market. Best of all, when you sell your house, the price appreciation on the house is tax-free (up to $500K for a couple, or up to $250K for a single. You need to live in the house for at least 2 of the 5 years before the sale to get the tax break).

The Burdens of Home Ownership

• School tax: this is usually the biggest tax bill for a home owner. The rate varies from area to area. This alone can totally wipe out the tax savings from the mortgage interest.
• Local property taxes: collected by county and/or municipal government. This is usually a fraction of the school tax.

Don't think that by renting an apartment you have successfully avoided these taxes. They are already included in your rent.

Time and effort wise, a home owner needs to spend a lot of time working around the house: take care of the lawn, flowers, and trees, stain the deck, and repair the house (especially when the house gets older), etc. After it snows, cleaning up the driveway can be a back-breaking job.

If you want some of the benefits of owning a house, but don't have time to work on it, then you may want to buy a townhouse, in which case all the yard work is taken care of by someone else. The drawbacks of owning a townhouse are lack of privacy and less potential for value appreciation.

Find a Neighborhood

Factors to consider in deciding where to buy your house:

• Distance to your work. This affects your daily commute, should be considered first.
• School district. A good school district means good education for your children without you paying extra to send them to private schools. It is also the most important factor that drives the value of houses.
• Environment. Check to see if there are any environmental hazards in the area (chemical plant etc.). Scorecard.org is a great resource.
• Convenience to shops, hospital, etc.
• Within a community, avoid houses that are too close to the main water or drainage line. Go to the county's business office and ask for a map of the community, which should have the utility lines marked.

Find a Realtor

Once you have decided where to look for a house, you should find a realtor who is familiar with the area.

A realtor, or real estate agent, who is experienced in buying and selling houses, can be a big help. Realtors get commission from the seller, but usually work mostly for the buyer (unless you are buying a resale home and your realtor happens to be the seller's agent). The standard commission for the realtor is 2.5% of the sales price for new homes, and 3% for resale homes.

You can go without a realtor. However, in most cases a realtor brings valuable information and experience. Furthermore, in many cases, not having a realtor would not save you money on the house price, even though it saves the seller a significant amount of money.

After understanding what kind of house you are looking for, the realtor should do a search in the database, print out a list of homes that may interest you, and then make appointments and drive you to see the houses. If you don't have a realtor, the best place to go is the Web, which has all the listings you can get from local newspaper etc., with searching and filtering capabilities.

Find a Home

You may wonder whether you should buy new or resale. There are actually three categories: new construction homes, resale homes that are rather new (say, no more than 6 years old), and older resale homes. Here are some thoughts:

• It feels good to live in a new house. The risk that the house has a defect that the inspection cannot reveal is low. You usually get a one-year warranty. You get to choose the lot, the style, and the configuration of the house. However, first-time home buyers may not know enough about all the features to make a smart choice. New homes usually have higher ceilings on the first floor, where the living room, dining room, kitchen, and family room are. New homes are also more energy-efficient, which saves you money on utility bills. In a new community, most people are new, which makes it easier to know your neighbors. However, it may take up to several year after you move it before the whole community is fully developed. Noise and dust from construction can be annoying. Also, a new community may be far away from shopping centers and other service facilities.
• A resale home that is rather new can be a very good choice. The community is well-developed. The first owner has done some of the hard work to get the house and yard going. It may have all the nice features you can get from the new construction homes. However, resale homes are less exciting. Also it's always a mystery to you what exactly happened to the house in the past that may bring trouble in the future.
• Older resale homes. Well, you probably have owned a used car. You know what it takes. Although the structure of a house may not be more complicated than a car, the repairs tend to be urgent and expensive. Problem with the roof, the plumbing system, the water heater, etc. can really give you headache. Old houses are usually less energy-efficient, with lower kitchen ceilings, and without such new features as a first-floor study room.

Choosing the Options

The most popular house style is colonial, which has a basement, and two floors above. The typical options are:

• Basement: should be a full basement, meaning the size of the basement is almost the same as the first floor. Walkout basement is a nice feature, which gives your basement enough nature light. Basement is where the water heater and the furnace/air conditioner are. You can spend some extra money to have the basement finished, with some rooms and a place for exercise and other activities. Or you can leave it unfinished. Chinese young couples often put a ping pong table in the basement. If you want to do that, definitely buy a foldable one.
• First floor: living room, dining room, kitchen, family room, laundry room, and garage. Should have a half-bathroom (meaning toilet only, without a shower). Some have a study room. Some houses have a sun room next to the kitchen. Living room is where you meet guests who are on a short-visit. Family room is where you spend most of your time with family and friends.
  • One option is bay-window, which pushes your windows outward to give you more space. You should see a similar house with bay windows to decide whether you like it.
  • The front of the house can be either brick, stone, stucco (一种水泥), or a combination of these. They don't seem to differ much in function. You need to see similar houses with the different types of front and decide which type you like the best.
  • If you have a 2-car (or even 3-car) garage, you should consider whether to have a one-pice garage door or 2-piece garage door. If you have a one-piece door, then you just need to install one automatic garage door opener (although you may need one with more power). Also if you have a rather wide car (say Ford Crown Victoria), or an inexperienced driver in your family, then having a one-piece door would make life easier for the drivers.
  • For the fireplace in the family room, you should be able to choose gas fireplace instead of a traditional one, which means you can start the fire by pressing a button on the remote control.
  • In the laundry room, make sure everything is set up for installing a washer and dryer. A gas dryer can save you money on utility bill (unless the cost of natural gas goes up much more than electricity in the future). If you want that, make sure there is gas line in the laundry room.
  • If you want to do Chinese cooking in the kitchen, ask the builder to install a ventilation hood (抽油烟机) for you. You can buy a Chinese-style 抽油烟机 yourself. Ventilation hood is sometimes called range hood. Range means 炉灶.
• Second floor: bedrooms, with a master bathroom, and an additional full bath. The master bedroom may have a sitting room, which is a good place to put a desk and a computer. If you can find someone living in the same type of house built by the same builder, ask how soundproof the house is. If it's not satisfactory, ask the builder if it's possible to make it more soundproof.
• Landscape: make sure that water coming down from the roof will flow away from the house.
  
• General: make sure that wherever you want a phone jack (for telephone, computer modem, fax machine, etc.), there is one. Do the same checking about cable connection.

Once you have decided on which house to buy, you will need to sign a sales agreement with the seller. The agreement will have details of the house, and the payment schedule. Usually you need to pay 5% upfront, another 5% shortly, and the rest of your down-payment, as well as a check from the mortgage company to cover the rest of the sales price on the closing day. The closing day is when you pay the seller and get the keys to the house. On the closing day, you will also pay closing cost, which include sales tax, transaction fees, etc.

One other thing you need to do after signing an agreement, and before the closing day, is to do a title search. This is to make sure that the owner has full ownership of the house. You should avoid using a title company associated with the seller. This can cost over $1000.

Get a Mortgage Loan

Although loans are issued by banks and other financial institutions, it's usually cheaper to get a loan from a broker than from the lenders themselves (same as buying an airline ticket).

People usually pay 20% down-payment to avoid the mortgage insurance. Also if your loan amount is greater than $240,000, you will get jumbo loan rate, which is significantly higher than a standard loan rate. One way to get around these issues is to apply for two loans.

You can compare mortgage rates offered in your area at Bankrate.com. When comparing loan rates, pay attention to the following factors:

• Point, or origination fee: each point costs 1% of the loan amount, and will get the mortgage rate 0.25% lower. So if the rate is 8.5% with no points, and your loan amount is $220,000, you can lower the rate to 7.75% by paying 3 points, or $6,600. If you know how many years you will live in that house, you can decide whether it's worth it to pay points. The longer you are going to live in the house, the worthier it is to pay points.
• Period: this mean how long this rate is good for. It's usually 60 days, meaning that you can use this rate only if your closing day is within 60 days from today.
• Type of loan: the most traditional one is 30-year fixed. This means the loan is for 30 years and the rate will stay the same for that whole period. There are also 20-year fixed, or 15-year fixed. 5-25 ARM means that the rate is at the current specified rate for the first 5 years, and then be adjusted (based on the interest rate in 5 years) once and stay that way for 25 years. There are also 7-23 ARM mortgage, etc.

If you don't have a green card, you may not be eligible for mortgage from certain lenders. When you look for a broker, try to find one who has experience with applicants who don't have a green card.

For a bank to lend your money, it first needs to check your credit history. Then it needs to do an appraisal of the house. They won't lend you $300,000 for a house that they think is only worth $250,000. The scenario is that in case you cannot pay off the mortgage, the lender has the right to put the house on auction and take what they get from the auction to pay off the loan. If the house is not worth the loan amount, the lender has too much risk.

When you work with a broker, or several brokers at the beginning, they will ask you to fill out an application and then run a credit check on you (and your spouse if both of you are applicants). Many brokers don't ask you to pay for application or credit report, before you have decided to go with that broker. But you have to pay for the appraisal. So if you work with several brokers at the beginning, make sure they understand that you have not made a commitment, and that you are not paying multiple application and credit report fees (unless you think it's worth to pay multiple brokers to get the best possible deal).

The moment you lock down a rate, you have made a commitment to a mortgage loan policy. Lock down can happy no earlier than 60 days before your settlement (closing) day. To lock down a rate, you need to have paid for the appraisal (which is around $200). After that, if you want to withdrawal, you probably will have to forfeit the appraisal fee and any another fees you have paid.

To get your loan finally approved, you also need to have home insurance. You can insure the house only, or also insure things in the house.

One issue in a mortgage is the setup of an escrow account. With this you will put money into the account together with each mortgage payment. The lender will pay your taxes and home insurance out of it. It forces you to put money aside each month, so that you will not hold a tax bill and not have money to pay for it. If you think you are very disciplined with your money and do not like putting money somewhere without getting any interest, you can ask whether it's okay not to have an escrow account.

Inspection

If you are buying a resale house, inspection is definitely needed.

If you are buying a new house, although the mortgage company won't require an inspection, it's safe to do it. It may cost you $200-300 but may be worth it.

To find an inspector, avoid people who know your realtor, or mortgage broker, or the seller, so that you can get as unbiased a report as possible. Schedule an inspection with the seller before settlement.

Home-Owner Insurance

Insurance premium is based on the value of your house, and your deductible. It can be surprising how big a different the deductible amount makes. When getting a quote, be prepared to have your deductible at $1000 or more to bring down the premium.