The family contemplating the purchase of a home is vitally interested in knowing what part of its monthly payment is to be applied toward increasing its equity in the property. After considering taxes, repairs, and other expenses incident to home ownership, the home seeker who gets the impression that one-half, or nearly one-half, of each loan payment goes to the financing institution as interest is likely to become discouraged at the outset. Even if he has no erroneous ideas on the point, the mere conviction that the amount applied to interest becomes less and less as the months go on does not give him the same incentive to take the road toward home ownership that more exact knowledge would.

The average proportion of the monthly payment actually taken as interest may be readily derived from Tables IV and V containing figures in use by building and loan associations throughout the country. The first is a 6 per cent table in use by associations employing the monthly reduction plan; the second is used by those having separate savings and loan accounts and charging 7 per cent interest on the loan and crediting dividends at 6 per cent on savings. Both types of loan are repaid in about twelve years.

Table IV. $1,000 Loan At 6 Per Cent, Payable $10 Monthly

Month

Total Payments

Applied to Interest

12...............

$120.00

$58.36

24...............

I20.00

54.56

36.........,.....

120.00

50.55

48...............

120.00

46.25

60...............

120.00

41.71

72...............

120.00

36.89

84...............

120.00

31.76

96...............

I20.00

26.32

108...............

120.00

20.52

120 ...............

I20.00

14.40

132...............

I20.00

7.89

139...............

70.65

1.44

$1,390.65

$390.65

Table V. $1,000 Loan At 7 Per Cent, Payable $10.83 Monthly 6 Per Cent Dividends Credited Semiannually

Month

Total Payments

Applied to Interest

Dividends Credited

12...........

$129.96

$70.00

$ 1.66

24...........

129.96

70.00

5.42

36...........

129.96

70.00

9.40

48...........

129.96

70.00

13.63

60...........

129.96

70.00

18.11

72...........

129.96

70.00

22.87

84...........

129.96

70.00

27.91

96...........

129.96

70.00

33.27

I08...........

129.96

70.00

38.95

120..................

129.96

70.00

44.97

132...........

129.96

70.00

51.37

140...........

75.81

46.64

38.08

$1,505.37

$816.64

$311.28*

* Includes credit of $5.64 due borrower.

By dividing the total interest ($390.65) by the number of monthly payments (139) we find that the average monthly interest charge is $2.81 - more like one-quarter than one-half of the monthly payment of $10.

Subtracting the dividends ($311.28) from the total of the interest column ($816.64) gives the net cost to the borrower ($505.36). Dividing this net interest cost ($505.36) by the number of monthly payments (140), we find that the average monthly interest charge is $3.61, exactly one-third of the monthly payment of $10.83.

The practical application of the results of these calculations becomes more evident when we deal with a typical undertaking. Assume a $5,000 building and loan obligation on a 6 per cent basis. The monthly payment to the association is $50, and on the average the home-owner's equity grows at the rate of $35.95 monthly. On the 7 per cent basis referred to, the monthly payment is $54.15, and the average monthly credit toward the equity is $36.10. How often do we see the advantages of amortization presented to the home seeker in this way?

[Note. - In addition to the sources from which money may be borrowed for home financing, arrangements have from time to time been made by employers to assist employees who are desirous prospective home-owners in home financing. From a survey of 430 companies made by the U.S. Department of Labor, 196 reported an effort to encourage employees in systematic saving, and many of these companies make specific arrangements for home financing. One large mail-order house sells thrift certificates, which bear 5 per cent interest, and any employee who is head of a family and who has saved $500 may borrow money from the company for the purpose of financing a home.

Other arrangements also are made similar to the following one of a particular company: Employees after three months' service are eligible to participate in a savings plan whereby they may pay into a savings fund an amount not over 10 per cent of their wages. The company pays at the end of each year one-half the amount paid by the employees. This is credited to each employee's account during a period of five years at which time the employee may withdraw his funds with 6 per cent interest. If he withdraws his money before five years he forfeits the corporation's funds of the incomplete year. At the end of the sixth year after this plan had been established about one-fifth of the employees who participated in the plan used the money for home financing.

Companies with no specified plan give advice and financial assistance in home buying. Others encourage home ownership by making specific arrangements for financing the second mortgage.

Such admirable efforts on the part of employers as those mentioned above which assist workers in financing their homes undoubtedly encourage home ownership in a greater number of families than those which have received the material help, for almost every family has a strong desire for an owned home and a few good examples in a neighborhood of attractively owned homes will encourage saving for this most worthy purpose.]