The lender, if unscrupulous, may encourage the purchase of an expensive piece of property when he is confident the buyer cannot meet the payments, so that he can foreclose the mortgage and buy back the property himself at a forced sale, when prices may be low. This is an additional reason for dealing with a responsible institution, which will usually advise against a purchase beyond one's means.
If the owner retains the title to his land and pays the contractor as the work progresses, he may have to make some special arrangement to borrow money before the house is complete. He will, of course, have to pay interest on the sum so borrowed while he is still paying rent, and he may consider the interest he pays during the construction period as a part of the first cost of his house.
Building and loan associations will, in many cases, prove the best means of financing a home, for they are often able to loan as much as 70 to 80 per cent of the real value of a home, which is generally above the limit allowed by law for savings banks and insurance companies. Such a loan, therefore, may avoid the added complications, disadvantages, and expenses that may be involved in case both a first and second mortgage are required. Building and loan associations are often especially helpful in providing means of financing during the construction of a new home. They are usually organized with the chief aim of assisting home-buyers and home-builders. Their system of selling shares on which payments must be made weekly or monthly has proved an invaluable aid to hundreds of thousands of future home-buyers in accumulating savings and furnishes a sound and helpful scheme for paying off the principal of loans.
The officers of these associations are generally able to give very good advice to home-buyers and frequently help them to avoid unwise purchases. (For additional information, see pp. 29-31.)
In some states cases arise where better terms can be made when the title does not pass to the buyer as soon as he occupies the home, but remains with the seller for a few months, until the cash payments amount to 25 or 30 per cent of the total value of the property.
Agreements under these general circumstances assume a variety of forms. It is especially important that the legal details be sound in every respect and that the integrity of the seller be well established.....
No matter how little or how much one has to borrow, it is good policy to pay off part of the loan at regular intervals. This process of paying off the principal a little at a time is called amortization. Thus, on a loan of $1,000 at 6 per cent interest, payments of $10 a month, or $120 a year, will take care of the interest on the loan and cancel the principal in less than twelve years, leaving the home free of debt. The president of a large savings bank, who has also been president of the savings bank section of the American Bankers' Association, states: "Paying off a loan in installments is like attacking an army in detail. The borrower, instead of having one large payment to look forward to, has a succession of moderate payments, which can be easily met."
The payments agreed on for amortization are usually met regularly, so that the loans are paid off steadily out of savings. This reduces the interest charges and leaves the family much better off financially in case of death or misfortune. Where no amortization is agreed to, on the other hand, many loans are not reduced before they fall due, and savings have not been built up to pay them off. Such loans sometimes drag along for a lifetime, and may be foreclosed when they cause great distress. The prudent course is to start paying off the loan as soon as the purchase is made. Most building and loan associations provide that the loan may be paid off sooner than its maturity if the borrower so desires, and without disadvantage.
No mortgage on a home should be regarded as permanent, for if there is a shortage of mortgage money when it falls due there may be difficulty about renewing it. In the case of second mortgages, especially, this is important, and they should be amortized as quickly as possible.