Evening star., 1938-01-22
HOME MORTGAGE
INTEREST DROPS
Decline Since 1881 RANGES
From 0.3 to 9 Per Cent
Throughout U. S.

rates charged by savings and loan
associations are progressively on the
decline In practically every section of
the country, 1t is reported in the cur
rent issue of the Federal Home Loan
Bank Review. The declines since
1881 ranged from a minimum
OF o.3 per cent in Eastern States to
. maximum varying between 3 per
cent and per cent in the South
and West" it is stated.
In analyZing these declines the
Review is careful to point out the
adherence between an effective, or
true' interest rate and nominal
one. since much confusion exists as
TO the meaning of these terms:
"A nominal interest rate, as its
name implies, is the interest rate
which is named in the mortgage loan
contract. In most cases it does
not represent accurately the actual
cost to the borrower of the mortgage
money which he obtains. If, for ex-
ample, an initial loan fee, service
cnarge, or commission is paid by the
borrower. he is actually paying in
terest during the life Of the loan at
Q rate IN excess of the nominal rate
specified in the contract.
Effective Rate Total Cost.
An effective interest rate, on the
other hand, represents the total cost
to the borrower of the mortgage
money during the entire life of the
Ioan."
Also. the type Of repayment plan
used by the institution has q definite
s1ect on the interest rate. This is
. fact seldom realized by the average
borrower. The Review states that IF
the borrower contracts to pay interest
upon the face amount of his loan.
although by his principal repayments
he constantly reduces the original
amount Of his Indebtedness, he is
paying an effective interest rate which
rs greater than the nominal rate
specified In his contract"
The Review gives as a major cause
OF the decline in interest rates since
1881 the adoption of the direct-re-
duction method Of loan repayment,
which eliminates the hidden factors
increasing the effective interest rate
over the nominal rate. 1t states:
The savings and loan associations
were the first institutions in this coun-
try to make a regular practice of lend
Ing home mortgage funds for long
terms. The savings and loan associa-
tlons were also the leaders in the
movement, which has become increas-
1ngly general in recent years. toward
the use of the long-term amortized
loan known as the direct reduction
plan. Under this plan, the principal
amount OF the mortgage indebtedness
decreases each month and the bor-
rover pays interest only upon this con-
stantly diminishing balance"
System Founded in 1892.
The Federal Home Loan Bank sys.
TEN. which was organized in 1882, has
required that Federal savings and loan
associations use the direct reduction
plan and has been instrumental in
achieving its widespread adoption.
While stressing the fact that the
downward movement of savings and
loan interest rates since 1881 is a re-
Election Of the comparable downward
movement OF the whole general struc-
ture Of interest rates, the article in
che Review states further:
"A second ma jor cause of decreased
interest rates charged by savings and
loan associations has been the exist
ence Of the Federal Home Loan Bank
system itself. The creation of the
bank system provided a central reser-
voir Of credit from which advances
were made to members to supplement
local home financing funds when the
demand for home mortgage loans In a
community exceeded the supply of
local available capital. Because these
additional funds were available from
the Federal Home Loan Banks, the
economic isolation of the member
home financing institutions and their
complete dependence upon an in
adequate supply of local capital. was
ended. The fact that members of the
bank system are assured today of
credit on either short-term or long
term advances at rates OF interest as
low as 8 per cent has contributed sub
stantially to the markedly greater re-
ductions in interest rates in the South
and West"
This statement Is adequately sub
stantiated by the Reviews ANALYSIS:
- In 1881 every State West of
the Mississippi, except Iowa and Louis
lana. had average effective interest
rates OF 8 per cent or more. In 1888
there were no States west of the Mis-
sissippi where the average effective
interest rate charged by Federal saw
angs and loan associations was in ex-
cess Of 7.3 per cent"