DEPARTMENT OF COMMERCE

WILLIAM F. WHITING, SECRETARY PRESENT

HOME FINANCING METHODS

BY

JOHN M. CRIES and THOMAS M. CURRAN

DIVISION OF BUILDING AND HOUSING

BUREAU OF STANDARDS

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DEPARTMENT OF COMMERCE

WILLIAM F. WHITING, SECRETARY

PRESENT HOME FINANCING METHODS

BY

JOHN M. CRIES AND THOMAS M. CURRAN

DIVISION OF BUILDING AND HOUSING BUREAU OF STANDARDS

Preliminary Edition

PRICE 5 CENTS

Sold only by the Superintendent of Documents, U. S. Government Printing Office Washington, D. C.

UNITED STATES

GOVERNMENT PRINTING OFFICE WASHINGTON

1928

CONTENTS

Page

Foreword 1 iv Introduction 1 Three groups of borrowers 1

First group 1 Building and loan associations 2 Life-insurance companies 2 Savings banks 3 Trust companies 5 Mortgage companies 5 Private investors , 6 National banks 6 Second group 7 Building and loan associations 7 Second mortgage borrowing 9 Third group 11 The third mortgage 11 The land conti’act 11 Choosing a home-financing agency 13 Improvemefit of facilities 15 Appendix 16 The mortgage-loan application 16 Amortization tables >— 17

Effect of premium, commission, etc., on interest rate paid by

borrower 18 Table of monthly payments, based on $100 loan 19 Actual rates of interest paid on second mortgages 20

Effect of high interest rates on housing standards and the construction industries 22

Publications on housing, city planning, zoning, and building codes 24 in
FOREWORD

By IIi':rbert Hoover Hmiclreds of tliousancls of families wlio set out to own their homes

ea(!h year find financing the most trying problem which they have to surmount. This pami)hlet aims to aid them nn choosing the lending

agencies which will best meet tlieir needs. A well-managed insti- tution may save a family from failure in its efforts, and hundreds

of dollars in cash, through the terms which it offers, and by rendering

advice and friendly counsel. Probably several thousand institutions

in the country to-day are giving such service in connection with

lending on first mortgages.

It often happens, however, that a family is severely handicapped

in attempting to carrj^ through a sound transaction because it has

to pay excessive charges for borrowing on a second mortgage, or because such funds are not available or can be had only at prohibitive

rates. The authors of this booklet have given a careful discussion

of the factors which a family considers before taking out a second

mortgage.

I hope that this pamphlet, which was prepared with the cooperation of leading individuals as;sociated with the principal types, of

home financing institutions, may encourage the establishment of more adequate local second-mortgage financing agencies doing busi- ness at a reasonable charge, and constituting part of the recognized

financial structure of our communities.

The way has already been pioneered in a number of cities. The

United States has the most abundant capital resources of any great

nation in the modern world and can ill afford to let this field of

credit suffer from want of adequate organization. An adequate,

constructive solution would help to maintain home building at a high rate, and thus contribute to active and stable business conditions.

But, of even deeper importance, such action will enable more families

to achieve the independence and security and greater return from

life which go with home ownership, and make our body politic more

sound.

IV
PRESENT HOME FINANCING METHODS

INTRODUCTION

In attaining home ownership most American families need some

financial assistance. The amount which must be borrowed represents

in some cases a relatively small but more often a large part of the

outlay. Although conditions vary from one section of the country

to another, the extent to which borrowing is necessary generally determines the financing method employed, and for the purpose of dis- cussing the various plans they use, home buyers and liome builders

who borrow may be divided into three groups, as follows

:

THREE GROUPS OF BORROWERS

The first embraces those who can supply in cash 50 per cent or more of the price of the home, and vv^ho can get the remainder on first mortgage ^ from any of several different sources. The second includes those whose cash resources are within the approximate limits of from 25 to 40 per cent, and who borrow the

amount needed either on first mortgage (usually only from a building

and loan association) or through the use of a first and a second

mortgage.

The third comprises those who have but 10 or 15 per cent of the

price, who sometimes finance through mortgage agencies, but more

frequently by means of an installment purchase agreement.

FIRST GROUP

Families in the first group generally experience little difficulty in obtaining the amount needed by placing a first mortgage on the property acquired. Since there are a number of lending agencies anxious

to make conservative mortgage loans, the problem of these families

often resolves itself into a mere question of choosing the one offering

the most satisfactory service and terms.

^ In some localities a “ deed of trust ” is used in place of a mortgage. The instruments

are similar in that their effect is to pledge the property as security for the loan. One

important difference between the two is that, in many jurisdictions, in case of failure to make payments a forced sale of the property may he effected more quickly under the deed

of trust. 1
2 U. S. DEPARTMENT OF COMMERCE

BUILDING AND LOAN ASSOCIATIONS

The l)uil(lin<i: and loan asso('iation is an iinpoi’tant financing source

for families in this giouj). These organizations make a practice of

lending considerably more than half the property value where such

loans are required, and they are, therefore, discussed in connection

with the second group of borrowers.

LIFE-INSURANCE COMPANIES

Another source of funds for home buyers in the first group is the

life-insurance company. Prior to the war most of the larger companies did not make housing loans to any considerable extent, pre- ferring to invest their funds in mortgages on large commercial structures, thus limiting the number of their transactions and the amount

of their investigational and administrative work. With the housing

shortage resulting from the war and the need for broader channels of

investments, howeA^er, many of these companies entered the homeloan field and they have become an important factor in the business.

The loans of life insurance companies are placed through local agents—banks, trust companies, mortgage companies, and individuals

trained in the Avork. These agents are permitted to accept applications only in connection with properties located in developed sections

Avhere A^alues are stabilized. The man seeking a loan to finance the

purchase of a house located on an unimproved street or in a section

where real estate does not sell readily will not generally be able to obtain it from a life insurance company. Applications from bor- rowers on properties located in groAving communities and having the

advantages of modern facilities, however, are eagerly sought.

The applicant is required to supply the loan agent with information bearing on the risk, on blanks furnished for the purpose. These

forms call for a variety of data, such as the location, size, and contour

of the lot, the condition of the building, the materials of which it is constructed, and its heating, lighting, and plumbing system.^ The

agent investigates the risk, appraises the property, and reports to his

company. His appraisal is invariably a conservative one, and the

borrower should not be surprised if he learns that the home he has

contracted to buy is A^alued for loan purposes at a figure someAvhat

below the price he has agreed to pay. This valuation is not necessarily a reflection on the Avisdom of the purchase, for in determining

the question of value a number of insurance companies are inclined to disregard certain items which are generally (and properly) con- sidered by buyers and sellers as legitimate elements of worth. As an example of this, the appraisal policy of one of the largest companies

in the home loan field may be cited. This company does not alloAA’

^ See Appendix, p. IG. The mortgage-loan application.
PRESENT HOME FINANCING METHODS 3

its agents to include in their estimates of the cost of a building the

builder’s overhead expense, his carrying charges or profit. As a consequence of their appraisal methods the loans of the more conservative companies, though made up to 60 per cent of valuation,

seldom represent more than 50 or 55 per cent of the cost of the

property to the purchaser.

Insurance company loans run for periods as long as 15 years. Interest is at the rate prevailing in the locality where the loan is made, and is usually payable semiannually. In many cases the

principal is required to be curtailed regularly on interest dates. The

contract of one large company requires a payment of 3 per cent of the

principal semiannually and gives the borrower the option of making

larger payments or of taking up the entire loan after the third year. The plan of another company provides for the payment of the loan

and interest in equal monthly installments over a period of 10 years. This company makes a life insurance policy a part of the mortgage

agreement, so that if the borower should die the loan may be repaid

from the insurance proceeds. In cases where such an insurance

policy is involved the home owner who wfishes to sell his property

shortly after the mortgage is placed is usually required to obtain the

company’s permission to transfer the loan to the new owner. Insurance companies seldom lend their funds for construction purposes, and, therefore, where a family builds its home the money

needed during the construction period must be supplied from some

other source. The agent frequently arranges such a temporary loan,

however, on the basis of his company’s willingness to take over the

financing when the structure is completed, and where banks and

other financial institutions act as agents they often advance their

own funds for the building period, after which the loan is transferred

to the insurance company. Some additional expense to the borrower

is usually involved in these instances.

The insurance company loan has this important advantage: It is made for a period sufficiently long to enable the borrower to repay it without the necessity of renewing, and thus to avoid the inconvenience

and expense frequently incident to this process. Where amortization, or gradual repayment of the principal, is provided for, interest

charges are reduced and the borrower is encouraged to get out of

debt.® SAVINGS BANKS

A third lending agency, which often lends somewdiat more than the

insurance companjq is the savings bank. The type knowm as mutual

savings banks, found principally in the East, invest heavily in

mortgages on homes.

* See Appendix, p. 17, for amortization plans.
4 U. S. DEPARTMENT OF COMMERCE

Applications for mortgage loans are made to the real-estate de- partment of the hank or, where no separate department has been

created, to the ollicer appointed to pass on such applications. Appraisal methods vary. Frequently an officer or committee* of the

bank visits the property and determines its value by personal inspection. Under normal conditions the valuation reached is not ordinarily greatly below the market value.

In making real -estate loans savings banks are generally restricted

by State laws which fix the maximum percentage of property value

that they may lend. In some States this maximum is 50 per cent; in others it is as high as 60 per cent. These laws, however, do not necessarily determine whether a bank’s lending policy shall be liberal or

conservative.

A bank located in a State permitting the higher ratio of mortgage

loan to value may be unwilling to lend up to the legal limit or may

regard existing prices as inflated and fix an appraisal value well

under the selling price. One restricted to 50 per cent loans may,

however, appraise property at the full selling price, and advance as much or more money on a given home than the bank operating under

the more liberal statute, whose policies or appraisal methods are more

conservative.

Savings bank loans are frequently made for short terms—for pe- riods of one, three, and five years—and are repayable in full at the

end of the term. An increasing number of banks are making longterm loans, however, which are repayable in installments similar to those of building and loan associations, which are discussed later,

and of some of the life-insurance companies. Banks making the

short-term “ straight ” loans are usuallj^ willing to renew, but some

of them make a charge for granting this privilege. Where there has

been undue depreciation of the property, such as would result from

the owner’s failure to keep it in repair, or where its value has been

lessened through changes in the character of the neighborhood, diffi- culty may be encountered in renewing the loan, at least in its full amount.

A number of savings banks do not lend for construction purposes,

regarding these loans as a greater risk than those predicated on the

security afforded by an existing building. Undoubtedly there is a larger element of risk unless special precautions are taken. The

home builder or his contractor may build the house of materials

inferior to those called for in the plans and specifications on which

the loan is based, or, through ignorance or a desire to economize, may

construct it pooUy. Under such circumstances the bank may find

itself holding a mortgage on a home for a sum which it would not

consider lending if the loan were applied for on the complete property. Banks making construction loans usually require the owner
PRESENT HOME FINANCING METHODS 5

or contractor to furnish a bond guaranteeing the completion of the

building according to plan, or advance the loan money in installments

as the work progresses and is inspected. Few losses are suffered

where such methods are followed.

It is possible for the home builder to finance through many savings

baTiks which do not make building loans, by obtaining credit from

building-material dealers for the construction period and using his

available casli to pay the labor cost. The bank then lends on the

completed structure and the building material is paid for with the

loan funds.

Home owners who want their loans to run five years or more fre- quently find that the local savings bank makes its loans payable on demand or advances funds for periods of but one, two, or three years, and home owners who wish to amortize their loans often are unable

to borrow from a savings bank on this basis. Officials of some banks

restrict their loans to short terms because they feel that mortgage

investments can not be readily converted back into cash in case the

institution needs the funds, and, therefore, plan to have these loans

fall due at comparatively short intervals. Many savings banks make

loans for terms of five years or longer, however, and report that they can sell such mortgages readily when funds are needed. Some sav- ings banks and other banks which sell their loans feel that they can

not put them on an amortization basis, since the investors buying

them do not wish to accept small payments on the principal, but a number of the institutions are solving this problem by retaining the

mortgages and selling investment certificates issued against them.

These banks receive the amortization payments on the various obligations, reloan them, and add new mortgages to the group behind the

certificates to keep the security constant.

. TRUST COMPANIES

A fourth source of funds for families in the group under discussion

is the trust company. In addition to large savings deposits, these

institutions have trust funds which are available for real-estate loans. Their lending policies and methods are similar to those of savings

banks.

MORTGAGE COMPANIES

In most of the larger communities mortgage companies are an t important factor in home financing. There are two classes of such

companies—^those lending on first, or senior, mortgages and those

lending on second, or junior, mortgages. The latter group is discussed

in a later section. Because of the lack of uniformity in the policies and methods of

mortgage companies, no general statements can be made as to how

531°—28 2
6 U. S. DEPARTMENT OF COMMERCE

they conduct their lending operations. They are not generally so

closely confined in their activities by legal restrictions as are banks,

trust companies, and insurance companies, and the use the}^ make of

tlieir funds, whether derived from the marketing of company stock, oi* the sale of their mortgage investments or bonds issued against them,

is therefore left more to their own discretion. Comj)anies selling

mortgages, the re])ayment of which they guai'antee, and those whose

investments are eligible for })urchase by savings banks and trustees, will be found tlie more conservative of this class of lenders. These

do not usually lend in excess of 50 per cent of their valuations, at

least in the case of ‘‘ straight ” loans. Many of the other companies

make loans larger than 60 per cent of the sale price, but usually

charge a commission or a higher rate of interest than that borne by more conservative first -mortgage paper. The loans of mortgage companies are made for both short and long terms and on the amortized

or straight basis. Manj^ of the companies devote a large pc^’centage

of their funds to construction loans. PRIVATE INVESTORS

Another group of lenders is made up of private investors. Unorganized and operating separately, their practices are, of course, even less standardized than those of mortgage companies. Frequently they are inclined to follow the methods of lending institu- tions in their communities. Since they are not handling the funds of

others, however (except where they act as trustees), they have greater

freedom of action than most of the institutions and are often found

willing to advance a higher percentage of property value than are banks, trust companies, or insurance companies, especially where

they have an opportunity to obtain an unusually favorable return. The home owner who finances through an institution can usually

depend on being able to renew his mortgage, especially if he has decreased the loan principal by means of installment payments. There

is frequently less assurance of the permanence of the loan obtained

from a private investor. A change in the plans or circumstances of

the lender or his death may result in an unexpected failure to renew

the loan. This sometimes creates an exceedingly embarrassing situation for the home owner in a community having limited mortgage

facilities. In this connection it may be mentioned that trustees sometimes have limited power in the matter of extensions and

renewals.

NATIONAL BANKS

National banks and many of the other commercial banks have not

been lending on real estate to any considerable extent, partly because

of restrictive Federal and State laws. They have large savings
PRESENT HOME FINANCING METHODS 7

resources, however, and are, therefore, a potential source of funds

for home owners. A law enacted in 1927 permits national banks to invest as much as one-half of their savings deposits in realty loans

for periods up to five years, and many of them have commenced to devote a larger part of their assets to real-estate lending.

SECOND GROUP

Families having in the neighborhood of from 25 to 40 per cent of

the amount needed to buy or build a home have fewer agencies to choose from than families in the group heretofore discussed. In some of the States which do not have laws restricting their lending on real estate there are savings banks willing to advance the amount

required, and in some communities mortgage companies will make

such loans where the borrower pays a commission or a higher rate of interest than that prevailing for more conservative loans. The

building and loan association, however, is the most popular source of funds for families in this group.

BUILDING AND LOAN ASSOCIATIONS

The building and loan association ^ is an organization created for

the promotion of thrift and home ownership. It accomplishes its worthy objects by providing a method of saving and by lending its funds for the purchase and construction of homes. There are nearly

13,000 of these institutions in the country, having in all more than

11,000,000 members and assets exceeding $7,000,000,000.

Various plans for obtaining funds are emplo^^ed by the associations. Under the plan in most common use members subscribe for

“ shares ” and make regular stated payments on them until the sum

of these installment payments, added to the dividends obtained

through the lending operations, equals the matured or face value of

the shares. Some associations require no share subscription but

accept deposits in almost any amount and at any time ; others derive

funds from the sale of full-paid shares or investment certificates. Frequently where their funds are insufficient to supply the demand

for loans, associations borrow for the purpose at a rate lower than

their own charge.

Building and loan associations usually pay a higher rate of return

to their depositors than is obtainable from other savings institutions,

and prospective home owners who place their savings in the associations may often accumulate sufficient funds to make the first payment

* This Is the name most widely used, but many other similar names have been adopted

by the various organizations throughout the country. The following are a few examples : “ Savings and loan association,’’ “ Building loan and savings association,” and “ Loan and

building association.” In Massachusetts the associations are known as cooperative banks and in Louisiana as homestead associations.
8 U. S. DEPARTMENT OF COMMERCE

on their homes more quickly than is possible by any other method

atr'ording equal safety.

Lending policies and methods differ among the associations.

Applications for loans usuaily are received onl}^ from members, but

in maii}^ associations the home buyer may easily enter the membership and apply for a loan at once. The loan-ap])lication forms fre- ({uently call not only for data regarding the site and the existing or proposed building but also for information as to the health, occupation, and income of the prospective borrower. The element of per- sonal responsibility is often given considerable weight, especially

where the loan applied for is large and the borrower’s equity

in the property small. In a number of associations the application is examined by the board of directoi'S, and if the proposition

appears sound on its face the appraisal officer or committee

is instructed to report on it, and title to the property

is ordered examined. Appraisals are usually made by personal

inspection. As in the case of savings banks and other institutions

lending on real estate, the valuation reported depends somewhat

on the attitude of the particular association toward the existing

realty market. Many building and loan associations appraise property at the full market value and are willing to lend on the basis

of two-thirds or more of their appraisements. In some cases as much

as 80 per cent of a fair valuation is loaned. The monthly amortization plan ® enables the associations to lend a very large percentage

of property value and yet provide a high degree of safety for their

investments. They find that these frequent payments on the loan more than offset depreciation of the property and declines in market

value. Association loans are made for periods as long as 12 years. The

interest rate is often slightly higher than that asked by savings

banks, trust companies and insurance companies, and a “ premium,”

or commission, is sometimes charged.® The associations justify these

liigher charges by calling attention to the fact that, as their loans

are made for long periods, the borrower is saved the expense of

renewals. They also feel that in making loans representing twothirds or more of property value they perform a greater service

than do institutions lending not more than half the amount of their

appraisements and are, therefore, entitled to a higher return. Borrowers seeking construction loans often find it to their advantage to pay the slightly higher rate asked by building and loan associations, as most of these organizations are specialists in this type of lending

and their service and advice in connection with the building project

frequently save the home builder much inconvenience and expense.

' See Appendix, p. 17.

^ See Appendix, p, 18.
PRESENT HOME FINANCING METHODS 9

Many associations require the borroAver to subscribe for shares

having a matured A^alue equal to the amount of the loan. In such

associations the monthly payments cover interest on the debt and

installment dues on the shares. Interest is calculated on the full amount of the loan throughout its term, but the borrower is credited

with dividends on the amounts applied toAvard his shares. When the

shares are matured they are used to cancel the loan. Other associations apply the monthly amortization payments directly against the

loan and charge interest on outstanding balances. The amount of

interest paid by the borroAver under the first arrangement is, of

course, larger than that paid under the second where the dividend

rate is lower than the interest rate. SECOND MORTGAGE BORROWING

In communities having no building and loan associations and in

those where the associations and other agencies are unwilling to supply on first mortgage from 60 to 75 per cent of the amount needed

to acquire the home, borroAvers in the second group generally find

it necessary to use two loans, the first obtained from any one of the

agencies previously mentioned and the second from an individual or organization advancing funds on second-mortgage security.

There are numerous private investors engaged in this kind of

lending, and a large part of the business is handled by organizations

called “ second,” or “ junior,” mortgage companies. In Maryland

and Pennsylvania many of the building and loan associations make

second-mortgage loans. As the legal rights of the second-mortgage lender are subordinate

to those of the lender on first-mortgage security, and as his risks are usually greater, he charges more than the first-mortgage rate. The

whole charge is rarely made directly, however, for the reason that

the maximum rates permitted by the usury laws of most of the States

are not high enough to yield a return satisfactory to the secondmortgage agency. In order to avoid violating the usury laws and

yet obtain a rate which they consider adequate to compensate them

for the risk the}^ assume, second-mortgage lenders conduct a dis- count business, purchasing second-mortgage notes at less than their

face value. As an example of the operation of this method of advancing funds, we may take the case where a note is purchased from

an operative or speculative builder who has accepted it from a home

buyer as part of the selling price of a property. Though the

builder usually adds to his price the amount of the anticipated dis- count and the buyer, in effect, pays a usurious rate on the obligation

transferred, the second-mortgage agency does not violate the usury

law.
10 U. S. DEPARTMENT OP COMMERCE

However, mncli of the demand for second-mortgage funds comes from o})erative builders who need the money for construction purposes and from persons building their own homes. In ordei* to obtain the business of these two types of borrowers and yet make the

transactions appear to be note purchases, a considerable number of

second-mortgage lenders grant loans through a third party whom

they procure to act as the lender. The borrower’s note is executed in

favor of this party, who indorses it to the second-mortgage agency.

I he latter discounts ” the note, to obtain an interest rate greater

than the legal maximum, and turns the proceeds over to the bor- rower. This is a mere subterfuge and the transaction is tainted with

usury. In those States which impose a light penalty on the usurious

lender, such as the loss of interest or part of it, this practice is freely

indulged in, however, and borrowers seldom attempt to take advantage of its illegal feature. As a rule, second-mortgage loans are made on the amortization

basis. Charges vary according to the locality, the demand for funds,

the risk, and the length of the loan period. Interest rates are usually

1 or 2 per cent above the prevailing first-mortgage rates, where the

State law permits, and discounts are quoted at from 4 to 10 per cent a year. Since the borrower is usually required to curtail the loan

periodically, and therefore, does not have the use of the whole amount

for the entire loan period, these discount rates are actually considerably higher. In fact, under the usual regularly amortized loan the

real discount rate is approximately double the advertised rate. But,

expressed entirely as an interest charge, the rate paid by the borrowei

is even higher (han the total of the combined nominal interest rate and the actual discount rate, because “ discount ” differs from “ interest ’ in that it is paid at the beginning of the loan term and not during the term or at the end of it. Thus, on a typical monthly payment

three-year second-mortgage loan bearing 7 per- cent nominal interest

and a 15 per cent discount (5 per cent annually, so called) the rate paid by the borrower is approximately 18 per cent a year."

In many communities the high rates charged for second-mortgage

funds have had a tendency to discourage home building. In some

of these communities this situation has been partly overcome by

chambers of commerce and other local groups.

In Gardner, Mass., a group of about 100 business men, cooperating

with the local chamber of commerce, agreed to become liable to the extent of $1,000 each on second-mortgage-note indorsements of a committee which they formed. No actual cash was required of the

members of this group, but by thus lending their credit they were

^ See Appendix, p, 20, pt. 1.
PRESENT HOME FINANCING METHODS 11

able to obtain second-mortgage funds for home owners from a local bank at a low rate of interest and without a discount charge. Similar

plans were used in several other cities. A second-mortgage company was formed in Providence, R. I., to provide funds for periods of 50 months at a total discount of 5 per

cent, covering the whole term. This company helped to relieve the

second-mortgage situation in two ways. It loaned several hundred

thousand dollars at relatively low rates, and through its operations

caused other local second-mortgage agencies to reduce their charges.

In some sections lumber dealers assist in solving the problem, and

at the same time increase their sales, by indorsing the second-mortgage

notes of home builders who purchase material from them.

THIRD GROUP

THE THIRD MORTGAGE

The home buyer able to make but a 10 or 15 per cent cash payment

can sometimes obtain a second-mortgage loan large enough to bridge

the gap between his initial payment and first-mortgage loan and

the selling price. Where the transaction is handled by means of

mortgages, however, the buyer is frequently compelled to use three

loans. The seller of the property as a rule holds the third mortgage

and receives no principal payments on it until the buyer has paid

off the second. In order to facilitate sales, many builders accept

third-mortgage notes as a part of the purchase price, but where they

sell these notes they usually add an allowance for the discount to the price of the property. In these instances the financing charges

borne by the home owner are extremely heav}q as discounts on thirdmortgage notes are considerably larger than those on second-mortgage paper. Buying a home from an individual or organization

unwdlling or unable to hold the note and to allow the purchaser the

full face value thereof is therefore not to be recommended.

THE LAND CONTRACT

Another, and a more widely used, financing plan for home buyers

in the third group is founded on the land contract. This instrument

is most popular in the Middle Western States. It is simply an agree- ment between the buyer and the seller of property under the terms

of which the buyer usually makes a small down payment and agrees

to pay the full purchase price in installments, frequently monthly.

The seller does not immediately pass the legal owmership of the

property to the buyer, but agrees to convey the title to him when

a certain percentage of the purchase price, say, 50 per cent, has been
12 U. S. DEPARTMENT OP COMMERCE

paid, at which time the buyer gives a mortgage to the seller or to some third party supplying a loan for tlie unj)aid balance.^

It is said in favor of the land-contract sales method tliat it makes

home ownership possible for a large class of persons who might be

unable to buy in any other way. Many real-estate operators like it for the reason that under it they retain the title until the buyer has

a substantial e(iuity, and therefore are often in a better legal position

than the holder of a mortgage would be in cases where the buyer

fails to live up to his agreement.

However, in many cases the land contract has disadvantages to both parties concerned. It is pointed out that the seller may legally contract to transfer title to property which he does not own when

the contract is executed, expecting to acquire it prior to the time

agreed for the conveyance, and that one who deals with an irre- sponsible seller contracting on this basis and unable to acquire the

property he has agreed to convey may sustain a considerable loss. This situation has sometimes arisen in transactions involving the

sale of building lots in new developments. While it is true that

the purchaser may often guard against such a contingency by makingsure that the seller has a good title and by recording the contract,

it is not customary for buyers on land contract to obtain an abstract

of title or a certificate of title insurance prior to the time for actual

transfer of title, and in some States no provision is made for recording the contract. Again, an unreliable seller might transfer the property to the

buyer encumbered with debts much larger than the amount due

under the contract, and in this instance the buyer would be compelled to assume obligations not contemplated by his agreement in order to retain the property. Such losses are often prevented by

placing the deed in the hands of a bank or similar institution, acting

as a third party, which applies the buyer’s payments properly and

delivers the deed to him at the time agreed upon.

Among disadvantages to real-estate men which cause many of them

not to enter into land contracts is the fact that a considerable amount

of capital which they may need for other purposes is tied up in financing the purchaser. In some places real-estate operators are unable to borrow on favorable terms on the strength of their land

contracts, or are unable to sell them at a satisfactory rate of dis- count. In some States sellers are deterred from using the method

because of the complicated and lengthy legal procedure required in

cases where the buyer defaults and the seller wishes to regain posses- sion of the property.

« In a number of States a land contract covering the difference between the down pay- ment and the first mortgage is often used in place of a second mortgage.
PRESENT HOME FINANCING METHODS 13

CHOOSING A HOME-FINANCING AGENCY

If the family about to buy or build a home has an account in a building and loan association or a savings bank which it knows has

served other families satisfactorily the problem of choosing an agency

may be a simple one. In order to obtain the best service and the

lowest actual rate for the type of loan best suited to its requirements,

however, a family may have to “ shop around ” and compare the loan

plans and rates of the various agencies and the service they render.

The long-term amortization loan of the building and loan association or life insurance company helps to assure eventual debt-free

home ownership and enables the home owner to avoid renewal

charges, but where there is a second mortgage to be amortized such

a loan plan may not be feasible in the beginning. Some first-mortgage agencies lending on a long-term amortization basis, however,

are willing to allow the mortgage to run as a straight loan until the

second mortgage has been taken up. If premiums or commissions are charged, the borrower should, of

course, consider them as additional interest payments and take into

account the true rate he pays.® He should also consider that under some plans of loan repayment the real interest rate is considerably

higher than the advertised rate. Unfortunately, the plans of some

agencies are purposely made complicated in order to conceal the true

rate charged.

Careful inquiry among persons of standing in the community will

usually lead the borrower to an honest and reliable agency which

offers reasonable rates and terms. What may be equally important

is the sound and helpful advice and service based on knowledge of

local conditions and home-owner’s problems which a sympathetic

lending agency renders. Making sure of the title, seeing that all back taxes and special assessments are paid, that there are no

mechanics’ liens or other claims against the property, placing in- surance, and making a contract with a builder are some of the points on which specific service may be given. The size of payments a family may safely undertake to meet in view of its income, esti- mating home-ownership expenses, the possibility of special assess- ments, the course of real-estate values and trends which may affect the character of the neighborhood are examples of problems on which

the lender may give helpful counsel.

The borrower on a second mortgage may hask^e to exercise great

jaution in selecting an agency and negotiating for such funds.

While there is a tendency toward better practice in the second-mortgage field, some of the individuals and organizations conducting this

® See Appendix, p. 18.
14 U. S. DEPARTMENT OF COMMERCE

type of business employ most irregular methods. The charging of

interest, for example, on the full amount of an amortization loan

throughout the entire term instead of on outstanding balances,

together with the discount charged, may run the true rate of interest

up to 25 or 30 per cent.^® Although tliis is not a general practice,

it serves as an example of the type of danger to be guarded against.

Where a purchase is to be made under a land contract the buyer

should satisfy himself as to the reputation and financial standing

of the sellei*. In this case, as well as in the case where the financing

is handled by means of mortgage loans, the bu}^er should also deter- mine to what extent financing charges are included in the selling

price of the property.^^

The prospective home buyer with a small amount of cash who

must pay, directly or indirectly, a large financing charge in con- nection with a second or third mortgage or land contract will do

well to ask himself whether or not it would be wise to defer the purchase until he has saved enough to make a more substantial down

payment and reduce the financing cost. Whether it is best for a family to delay purchasing for several years while saving additional

funds may depend on the circumstances of the particular case. Where a family moves into a city, for example, it might save $100

or $200 by deferring the purchase of a home for two or three years, but still decide, wisely, to go ahead. For by going ahead, it maj^^ save the expenses of moving once or twice, and, in addition, get

established just so much sooner in a neighborhood that it likes and

enable the children to have continuous schooling at one institution.

There may be other good reasons which will cause a family to pay

extra financing charges and not regret it, although they are a heavy

charge on the family pocketbook. (The fact that some families

knowingly pay excessive charges is, of course, no justification for

the lack of adequate financing facijities in the community.)

In other cases, such as that of a young couple, for example, the

sacrifice of continuing to live in inexpensive rented quarters for some time might be advisable in order to permit the accumulation of

larger cash savings to apply as first payment on a home. Certainly

tlie latter course is the wiser one for a family which has any reasonable doubt as to its ability to carry the mortgage obligations, after a careful consideration of the problem.

Sometimes an employer, a relative, or a friend will be found will- ing to provide second-mortgage funds at considerably less than the

market rate, directly or through his indorsement, and thus bring a family to the goal of home ownership sooner than would otherwise

be possible.

See Appendix, p. 21, pt. 2. See Appendix, p. 21, pt. 3.
PRESENT HOME FINANCING METHODS 15

IMPROVEMENT OF FACILITIES

‘ No doubt some improvement can be brought about in the home

financing machinery available in many communities. By taking full advantage of the safety afforded by the amortization method of loan

repayment, important first-mortgage agencies now restricting their

lending to not more than 50 per cent of property value can, in a number of States, change their policy and advance up to 60 or 65 per

cent and thus enable many home buyers and home builders to avoid

expensive second-mortgage borrowing. Loans up to two-thirds of

property value when confined to the lower-priced small homes in sound growing communities have, as a rule, proved entirely safe. A study of what has been done in several localities indicates that

groups of business men and others interested in the healthy growth

of their communities can, with small capital, render material assist- ance in improving local home financing facilities.^^ Where second-mortgage borrowing is necessary some of the inconvenience and expense incident to dealing with more than one agency

might be obviated by cooperation between the two agencies in the

matter of appraisals, title searches, and other legal work.

The opinion has been expressed that present usury laws are largely

responsible for the high charges made for the use of second-mortgage

funds, and it has been suggested that these laws be revised where

necessary to permit second-mortgage lenders to obtain a return on

their investments commensurate with the risk assumed, without the

necessity of adopting roundabout lending methods. It has been

suggested that the legalizing of this class of lending would put the

business on a higher plane and cause considerable amount of additional capital to be attracted to it, and that more uniform practice

and lower rates would naturally follow. The limited information

at present available unfortunately makes it hard to determine just

how far this and other suggestions might work out to improve

second-mortgage facilities. A thorough and comprehensive study of

the subject is needed.

In those States in which the mortgage laws and laws affecting

land contracts are unsatisfactory to lenders, and therefore have a tendency to limit the supply of capital available for real-estate investment, consideration should be given. to remedial legislation consistent

with justice to borrowers.

^ See Appendix, p. 22, for discussion of the effect of high rates on housing standards and the construction industries.
APPENDIX

THE MORTGAGE-LOAN APPLICATION

Mortgage-loan application forms vary with the type of lending

institution. Some call for considerable information from the bor- rower; others ask relatively little. The short forms usually cover only the more general features of the risk and the lenders using them

obtain the detailed information from their examining agent’s report.

Following is a list of points upon which information is often required

of the borrower, in addition to his name, address, amount of loan

requested, etc., and it is well for him to be prepared to supply the

data requested when applying for a loan

:

Legal description of property

;

Lot number, block number, address.

Size of lot

:

Number of feet front, depth.

Street

:

Improved, unimproved, being improved.

Value of lot. Value of building.

Description of building:

Size. Age.

Condition.

Brick. Frame. Number of rooms—

First floor. Second floor. Garage

Size. Building material. Value. Heating system

Steam. Hot water. Hot air. Lighting system

Gas.

Electricity.

Plumbing system

Connected with sewer. Complete with bath, toilet, etc., or incomplete, 16
PEESENT HOME FINANCING METHODS 17

House occupied by owner or tenant. Encumbrances

:

Mortgage.

Judgment.

Purpose of loan

:

Finance purchase.

Improve property.

Pay existing lien. CONSTRUCTION LOAN

When a request is made for a loan to finance the building of a new home the forms call for information similar to that listed above,

and for:

Estimated cost or contract price. Contractor’s name.

Contractor’s surety. Architect’s name. AMORTIZATION TABLES

Tal)le showing how a $1,000 loan at 6 per cent interest is retired in 11 years and 1 months hy monthly payments of $10 each

Month

Outstanding princi- pal during month

Monthly

payment

Applied to

interest Applied to principal

Principal due after installment

. payment

Ffrst - - $1, 000. 00

995. 00 $10.00 $5.00 4.98

$5.00

6.02

i $995. 00 Second .. 10.00 989. 98 Third 989. 98 10.00 4. 95 6. 05 984. 93 Fourth 984. 93 10.00 4. 93 6.07 979. 86 Fifth 979. 86 10.00 4.90 5.10 974. 76 Sixth 974. 76 10.00 4. 88 6. 12 969. 64 Seventh - 969. 64 10.00 4. 85 6. 15 964.49 Eighth 964.49 10.00 4. 83 6. 17 959. 62 Ninth 959. 32 10.00 4. 80 6. 20 954. 12 Tenth. 954. 12 10.00 4. 77 5. 23 948.89 Eleventh 948. 89 10.00 4. 75 6. 25 943.64 Twelfth 943.64 10.00 4. 72 6.28 938. 36

Year

Total of monthly

payments

Applied to

interest Applied to

principal Principal due at end

of year

$120. 00 $58. 36 $61. 62 .$938. 36 Second 120.00 54. 56 65.44 872. 92 Third . . . . . 120.00 50.55 69. 45 803. 47 Fourth 120.00 46, 25 73. 75 729. 72 Fifth 120.00 41, 71 78.29 651. 44 Sixth 120.00 36.89 83.11 568. 33 Seventh 120.00 31. 76 88. 44 480. 09 Eighth 120.00 26. 32 93. 68 386. 41 Ninth 120. 00 20. 52 99. 48 286. 93 Tenth 120.00 14. 40 105.60 181. 33 Eleventh 120.00 7. 89 112. 11 69.22 Twelfth (7 months) 70.00 1.44 68.66 1 .66

1 Principal due at end of 7 months.

-

Total interest paid during loan period, $390.65
18 U. S. DEPARTMENT OP COMMERCE

It will be noted that during tlie first year $58.36 is paid as interest

and $61.62 is apj)lied to })rincipal, while in tlie eleventh year only

$7.89 is paid as interest and $112.11 of the principal is retired. Semiannual and Annual Amortization

Where a loan is paid off in semiannual installments the interest

expense is a little higher.

Outstanding principal during

Semi- annual payment

Applied to

interest

Principal due after Installment payment

First 6 months, $1,000 $60. 00 60.00 $30.00

29. 10

$970. 00 Second 6 months, $970 939. 10 Total interest paid during first year 59.10 Under the annual amortization plan the interest cost for the first year is $60 as compared to $59.10 under the semiannual plan.

EFFECT OF “PREMIUM,” “COMMISSION,” “BONUS,” OR “DISCOUNT ” ON INTEREST RATE PAID BY THE BORROWER

The mortgage borrower is often required to pay a charge in addition to his interest expense. This charge, known as the premium,

commission, bonus, or discount, is usually, though not always,^® deducted from the face amount of the loan at the time the mortgage is negotiated. Thus, a borrower applying for the loan of $1,000 described in the example below, receives $960, a commission of 4 per

cent of the face of the loan having been deducted by the lender.

Example (i):

Loan of $1,000. Term, 10 years (120 months). Nominal interest rate, 6 per cent. “ Premium,” “ commission,” “ bonus,” or “ discount,” 4 per cent

($40). Principal and interest paid in 120 monthly installments of $11.10 each. It might appear that the deduction of $40 for the 10-year period, or $4 for each year, results in the addition of four-tenths of 1 per

cent to the nominal interest rate. ($4 $1,000 =0.4 of 1 per cent.)

However, since a part of the loan is paid off each month the borrower

does not have the use of the full amount throughout the whole loan

period. While he has the use of a large part of the money during the

early months of the loan, he has but a small part during the later months. The average amount outstanding throughout the entire

term is approximately equal to half the full loan. The commission,

therefore, adds about eight-tenths of 1 per cent to the nominal in- terest rate. ($4 = $500 (half the face amount of the loan) =0.8 of

1 per cent.) The commission being taken in advance by the lender,

slightly more is added to the interest rate, since the borrower does not

^ Some lenders charge a premium which is payable in monthly installments.
PRESENT HOME FINANCING METHODS 19

have the use of any part of the amount deducted, as he would have

if the commission were paid in the form of monthly interest. Where a commission or other fee is paid in addition to the interest charge, the real rate of interest paid may be found by referring

to the table on tliis and the following page. In the case of the loan

discussed in example (1) the borrower pays $11.10 per month and

receives 9.6 hundreds of dollars ($1,000 less $40). His monthly payment is therefore $1.16 per hundred ($11.10-^9.6). In the 120

months line in the table $1.16 is found under 7 per cent,” which is the rate paid.

Example (2) : Loan of $1,000, Term, 11 years 7 months (139 months). Nominal Interest

rate, 6 per cent. Premium, 3 per cent ($30). Principal and interest paid in monthly installments of $10.

The monthly payment per hundred is $1.03 ($10-^9.7). In the

139 months line of the table below $1.00 is found under 6 per

cent and $1.05 under 7 per cent ; $1.03 falls between these two figures

and the rate paid is therefore about 6V2 per cent. Example {3), Effect of commission, etc., on short-term loan: Loan, $2,000. Term, 3 years (36 months). Nominal interest rate, 6 per cent. Commission, 4 per cent ($80). Principal and interest payable in monthly

installments of $60.80.

The monthly payment per hundred is $3.17 ($60.80^19.2 hundreds of dollars received). In the 36 months line of the table $3.18

is found under 9 per cent, which is the approximate rate paid, since

$3.17 is but 1 cent less than $3.18. It will be noted that in example

(1), where the loan is on a 10-year basis, a 4 per cent commission

adds 1 per cent to the interest rate, while the same rate of commission adds nearly 3 per cent in the case of the short loan.

Tal)le showing monthly payment required to pay off a $100 loan in various

periods and at various interest rates

Loan period (months)

Interest rates (per cent)

5 « 1 7 * 1

1 11 121 1 1 1 16

1 17

1 1 1 20 Monthly payments

12. $8. 56 ^$8. 61' $8. 65 $8. 70

'

$8. 75 .$8. 79 $8. 84 $8. 88 .$8. 93 $8. 9s!$9. 03^$9. 07 $9. 12 $9. 17i$9. 22!$9. 26

13-. 7. 92’ 7.96; 8.01 8. 06 8. 10 8.15 8. 19 8.24 8. 29 8. 33 8. 38j 8.43 8. 48 8.52 8.57|I 8.62

24 4. 39 4. 43; 4.48 4. 52 4. 57 4.61 4. 66 4.71 4. 76 4. 80 4. 85i 4. 89 4. 94 4. 99 5.04 i 5.09

25 4. 22 ; ^-271 4. 31 4. 36 4.40 4. 45 4. 49 4.54 4. 59 4. 63 4.68 4.73 4. 78 4.83 4. 871 4.92

36 - 3.00

i "‘1 3. 09 3. 13 3. 18 3.23 3. 27 3. 32 3. 37 3. 42 3. 47 3. 51 3. 57 3. 62 3. 67 3.71

37 2. 92 2.97 3.01 3. 06 3.11 3. 15 3. 20 3. 25 3.30 3. 34 3. 39| 3.44 3. 49 3. 54 3. 59 3.64

48 2.30’ 2.35! 2. 39 2.44 2. 49 2.54 2. 58 2. 63 2. 68 2.73 2. 78| 2. 83 2. 89 2. 94 2.99: 3.04

-19 2.26: 2.31! 2. 35 2. 40 2.45 2.49 2. 54 2.59 2.64 2. 69 2. 74: 2. 79 2. 84 2.90 2. 95! .3. 00

1.89 1.93; 1. 98 2. 03 2.08 2. 12 2. 17 2.22 2.28 9 09' 2.38' 2. 43 2. 49 2.54 2.59 2.65

61 1. 86

i 1.95 2.00 2.05 2. 10 2. 15 2. 20 2.25 2. 30 2.35| 2.40i 2. 46 2.51 2. 57 2. 62 84"""""""” 72 1.61 ^ 1.66 1.70 1. 75 1. SO 1. 85 1. 90 1.96 2.01 2. 06 2.11’ 2. 17 2. 22 2.28 2.34 2.39

1.41' 1.481 1. 51 1. 56 1.61 1. 66 1. 71 1. 77i 1.82 1. 871 1.93 1. 99 2. 04 2. 10 2.16 2. 22 96— 1. 27 : 2.31| 1. 36 1.41 1. 47 1. 52 1. 57 1. 631 1.68 1.74! 1.79! 1. 85 1. 91 1.97 2.03 2. 09 108— 1.15jl.20| 1. 25 1. 30 1. 35 1. 41 1. 46 1. 52 1.58 1. 63 1. 69'

1

1. 75 1. 81 1. 88 1.94 2. 00

•20- 1. 06 1. 11! 1. 16 1. 21 1. 27 1. 32I 1. 38 1.43 1.49 1. 55 1. 61I 1. 67 1. 74 1.80 1.87 1. 93 132- .99 ' 1.04; 1.09 1. 14 1.20 1.25 ! 1. 31 1. 37 1.43 1.49 1. 55, 1.61 1. 68 1.74 1. 81 1, 88 139- .95 1 i.ool 1.05 1.11 1. 16 1. 22: 1. 28 1. 33 1.40 1.46 1. 52 1. 58 1. 65 1. 72 1. 78 1. 85

144... .92

; -1 1.03 1.08

!

1. 14 1.20 25 1. 31 1.37 1.44 1. 50 1. 57 1. 63 1.70 1. 77 1. 85
20 U. S. DEPARTMENT OP COMMERCE

Table showing monthly payment required to pay off a $100 loan in various

periods and at various interest rates—Continued

I.oan period (months)

Interest rates (per cent)

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Monthly payments

12 $9.31 $9. 36 .$9. 41 $9. 46 $9. 50 $9. 55 $9. 60 $9. 65 $9.70 $9.75 $9. 80 $9. 84 $9. 90 $9.95 $10.00 13... 8. 67 8. 72 8. 76 8. 81 8. 86 8. 91 8. 96 9.01 9. 06 9. 10 9. 15 9. 20 9. 25 9. 30 9. 35

24 5. 14 5. 19 5.24 5.29 5. 34 5. 39 5. 44 6. 49 5. 64 6.59 5. 64 5. 69 5. 75 5. 80 5.85

2.5 4. 97 5. 02 5. 07 5.12 5. 17 5. 22 5. 27 5. 32 .5. 38 6. 43 5. 48 5.63 5.58 5.64 5.69

3. 77 3. 82 3. 87 3. 92 3. 98 4. 03 4. 08 4. 14 4. 19 4. 25 4. 30 4. 35 4.41 4. 47 4. 53 37... 3. 69 3. 75 3. 80 3. 85 3. 90 3. 96 4.01 4.06 4. 12 4. 17 4.23 4.28 4. 34 4. 40 4. 46 48 • 3. 10 3. 15 3. 21 3.26 3. 32 3. 37 3. 43 3. 48 3. 54 3. 60 3. 66 3. 72 3. 78 3.06 3. 11 3. 17 3. 22 3. 28 3. 33 3. 39 3. 45 3. 50 3. 56 3. 62 3.68 3.74

(iO 2. 71 2. 76 2.82 2.88 2. 94 2. 99 3. 06 3. 11 3. 17 61.. 2.68 2. 74 2. 79 2. 85 2. 91 2. 97 3. 03 3. 09 3. 15 72 2. 45 2. 51 2. 57 2. 63 2. 69 2. 76 84 2. 28 2. 34 2.40 2. 47

96 2. 16 2.22 ACTUAL RATES OF INTEREST PAID ON SECOND MORTGAGES

1. Rate Paid on Typical Second-Mortgage Loan.

Loan, $2,000. Period, 3 years (36 months). Nominal interest rate, 7 per

cent. Discount or bonus, 15 per cent (-$300). Borrower receives $1,700 and

pays principal of $2,000, with interest at 7 per cent, in 36 monthly installments

of $61.80. The monthly payment per hundred dollars is $3.64 ($61.80

(monthly payment) -^17, number of hundreds of dollars received).

In the 36 months line of the table, page 19, $3.62 is found under 18

per cent, which is slightly less than the rate paid. The 15 per cent discount (5 per cent annually, so-called), therefore, adds more than

11 per cent to the nominal rate of 7 per cent. (See p. 19 for explanation of the use of the table on pp. 19 and 20 and for discussion of

factors involved in the determination of the effect of extra charges on

the interest rate.)

In order to facilitate the calculation of monthly interest, lenders

frequently require an even monthly payment. Thus, in the above

loan the monthly payment might be fixed at $60. In cases of this

kind the loan usually runs approximately an extra month and the

rate should be sought in the 37 months line of the table. Where

the loan runs for an extra month the discount or bonus adds some- what less to the interest rate, since the amount deducted is spread over

a longer period. The difference is not great, however. Dividing $60

by 17, the rate per hundred is found to be $3.53, or 1 cent less than

$3.54, which falls under 18 per cent. As the 36 months line shows that $3.53 per hundred represents a

rate of only a little more than 16 per cent, the necessity for deter- mining whether an extra month is added to the loan period is appar-
PRESENT HOME FINANCING METHODS 21

ent. This may be readily ascertained by consulting the table and

multiplying the rate per hundred found under the nominal rate charged by the number of hundreds in the face amount of the loan. Thus the rate per hundred in the 36 months line under 7 per cent

is $3.09. $3.09X20 hundred =$61.80. If the monthly payment

for such a loan is less than $61.80, the loan is probably on a 37 months’

basis. On a 3-year $1,000 loan at 7 per cent nominal interest the

monthly payment would be $30.90 ($3.09X10 hundred), but some

lenders would require a monthly payment of $30 and allow the loan to run about 37 months.

2. Rate Paid Where Sharp Practice is Employed.

A few lenders follow the irregular and misleading practice of cal- culating interest on the full amount of an amortization loan instead

of on outstanding balances, which practice has the effect of nearly

doubling the total payments made as interest. Example.—Second-mortgage loan of $1,000. Term, 2 years (24 mouths).

Nominal interest rate, 7 per cent. Discount, 15 per cent ($150).

The monthly payment which should be required to pay off the

principal and interest of this loan is approximately $44.80 (10 hundred dollars X $4.48 per hundred (found in the 7 per cent column

in the 24 months line of the table, p. 19) =$44.80. Since interest is calculated on the full amount of the loan throughout the

term, however, the monthly payment actually required is $47.50

($1,000X7 per centX2 years=$140; $1,000 +$140 =$1,140; $1,140 = 24

months =$47.50).

Dividing $47.50 by 8.5, the number of hundreds of dollars received,

the monthl}^ payment per hundred is found to be $5.59. In the 24

months line of the table, page 20, this figure is found in the 30 per

cent column ; 30 per cent is, therefore, the rate paid on this loan.

3. Concealed Charges.

There is a very large group of home purchases in which the true financing charges are concealed, because the seller takes a second

mortgage or land contract from the buyer in part payment and often

sells it at a discount. Under such conditions a family should always

find out what price the seller will take if he can be paid the amount

of the second mortgage or contract in cash. A family having $1,000 in cash to make as a down payment may

be offered a house at $6,500, placing a first mortgage of $3,500 and

giving a second mortgage of $2,000 to the seller. It may be ascer- tained that the seller would be willing to accept $6,200 as the total price of the house if he were to receive a total of $2,700 cash instead

of $1,000 and a second mortgage for $2,000. In such a case it is evi- dent that the seller considers a $2,000 second mortgage equivalent to
22 U. S. DEPARTMENT OF COMMERCE

only $1,700 in cash, an amount which he might obtain for it if he were to sell it to a second-mortgage company. For the purpose of

considering the true rate of interest paid, the family may consider

the transaction as exactly the same as the one in which a $2,000 second

mortgage was given to a third party and but $1,700 received with

which to pay the seller. (See pt. I, p. 20.)

HOW HIGH RATES FOR HOME-FINANCING CAPITAL AFFECT HOUSING STANDARDS AND THE CONSTRUCTION INDUSTRIES

High financing charges often compel a homeseeker to accept a house which does not meet his reasonable requirements. This situation tends to lower housing standards and deprives the buildingmaterial dealer, the contractor, and the building trades worker of

substantial benefits which should accrue to them. It may be illus- trated by a case like the following

:

From its savings of $1,200 a family purchased a lot valued at $1,000 and planned to build a house to cost $5,500. In order to build

the house it would be necessary to borrow $5,300. It was found that

a first mortgage of $3,500 could be obtained, but that $360, or 20 per

cent discount, would be deducted from the $1,800 second mortgage

applied for. The family would therefore lack $360. The secondmortgage agency offered to make the face amount of the mortgage

note $2,000 and to take a discount at the same rate, which would

amount to $400. The family would still be short $200 under this

arrangement, however, and even if it were found possible to raise the

needed $200 in some other way, the total of the second mortgage

monthly paj-ment—based on a $2,000 loan—and the monthly interest on the first mortgage would be too high for the family income.

Kather than abandon the idea of building, this family decided to build a house somewhat smaller than it actually needed and to omit

certain desirable features. In this way the cost of the house was

reduced from $5,500 to $4,750. The building was financed with a

first mortgage of $3,100, a second mortgage of $1,800 (from which

a discount of $360 was deducted, so that it provided only $1,440),

and $210 in cash. The equity of $1,200, which this family had, represented more than

18 per cent of the total value of the lot and the house originally

planned. Had it been possible to obtain a second mortgage even at

a somewhat higher rate than the nominal rate of 7 per cent asked,

but without a discount charge, this family would have acquired a better home and would have turned 750 additional dollars into the

construction industries. No doubt thousands of families, finding

themselves in a position similar to that described, abandon the idea

of acquiring a home, with consequent loss to themselves and to the

community.
DEPARTMENT OF COMMERCE

WASHINGTON

PUBLICATIONS ON HOUSING, CITY PLANNING, ZONING, AND

BUILDING CODES

[Printed documents, for which prices are noted in each case, may be obtained from the Superintendent of Docunrents, Government Printing Office, Washington, D. C., payments to be made by money order or New York draft; currency at sender’s risk. Postage or foreign money not accepted. Single copies of mimeographed material may be obtained upon request to the Depart- ment of Conrmerce, Washington, D. C.] Housing.

RHJi. How to Own Your Home. 28 pages. Price, 5 cents. By John M. Gries

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City Planning and Zoning.

RHIO. A City Planning Primer. 17 pages. Price, 5 cents. RHll. A Standard, City Planning EnaMing Act. 53 pages. Price 15 cents. RH3. A Zoning Primer. 7 pages. Price, 5 cents. RH5. A StandOA'd State Zoning EnaMing Act. 13 pages. Price, 5 cents. The above four publications are by the Advisory Committee on City

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as how much to pay for a home, financing, selection of the site, house plans,

and quality of construction, whether to buy or build, maintenance costs and

expenses of home ownership, and other problems involved in building or buying

a home. It contains financing tables based on various down payments and

showing typical annual expenses. Copies may be obtained from the Superin- tendent of Documents, Government Printing Oflice, Washington, for 5 cents

each, or $4.25 per hundred, cash or money order. This pamphlet. Present Home Financing Methods, has been prepared to meet

the needs of those requesting a fuller treatment of various home-financing

problems.

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23
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