One of the most common ways in which savings are lost is through speculation in real estate. Buying a lot in an improved section when one is ready to build is far different from buying a city or suburban lot where streets have not been put through, and where no water, gas, or sewer mains have been laid. Such a purchase is always in the nature of a speculation. It is well to remember that taxes must be paid on every lot and sometimes special assessments, too. The outgo in holding a lot is certain; profits are uncertain. Money in a savings account, on the other hand, keeps on earning interest for the depositor.
Some home-buyers have borrowed cash on their life insurance policies in order to meet their first payment. This action is almost always improvident. It deprives the borrowers' families of the full protection the life insurance should secure them. The presidents of many of the most important life insurance companies advise strongly against policy loans, even though their companies assume no risks in making them.
A loan on an insurance, policy, however, is not to be confused with an ordinary real estate mortgage loan which an insurance company may grant. Many of the companies which regard loans on policies as being against the real interest of policyholders take pride in the number of their mortgage loans to home-owners.
Mortgages.1 - First mortgages: Obtaining a loan with which to pay the balance between the first cash payment and the total cost of a piece of property is usually a simple matter when the amount paid down amounts to 40 or 50 per cent of the whole purchase price. The problem becomes harder as the proportion to be borrowed grows larger. No matter what loans are required, it is always best for a person without experience in real-estate matters to borrow from a responsible loaning institution, if only for the benefit of its advice in the matter of the validity of the title, seeing that all back taxes and special assessments are paid, that insurance is kept up, that there are no mechanics' liens or other claims against the property, and that the price paid is reasonable and the value of the property not likely to fall within a few years. The fees charged and services rendered by different institutions in arranging a loan may differ substantially and may more than offset a difference in interest rates. In most cases a loan from a good bank, building and loan association, or insurance company is an assurance that it thinks the proposition sound.
1 Mortgages and sources from which money may be borrowed are discussed more fully on pp. 23-36.
When money is borrowed for the purchase of a home the lender generally requires a mortgage or trust; that gives him the right to have the property sold at auction in case promised payments on the interest or principal of the loan are not made regularly. A first mortgage up to 50 or 60 per cent of the value of a house and lot is considered one of the safest possible investments, and it should be easy to obtain such a loan from a building and loan association, savings bank, insurance company, trust company, or from some individual - perhaps the seller of the house.
Second mortgages: In many cases, however, it will not be possible for the buyer to borrow all the money he requires on a first mortgage, and he may have to borrow additional funds on a second mortgage or note. The holder of the second mortgage takes more risk, consequently rates of interest on second mortgages usually run higher.
Bonuses or commissions of as much as 10 per cent are sometimes required for placing a second mortgage.
The character of the home-seeker is often a deciding factor in his ability to obtain a second mortgage on reasonable terms.
Discounts on second mortgages: The contractor who builds a house may take such a mortgage himself and expect to sell it at a quarter or a fifth less than its face value. This fact should be borne in mind, and the contractor should charge less for the house if the buyer can pay cash. Second mortgages are sometimes obtainable from companies which make a speciality of such business, from employers, and from relatives, friends, and other individuals with money to lend.