Up to this point the financing of the small house, for the one who has the money, is not complicated, but this is the unusual condition, because the average person who builds the small house has not the ready cash to put into it, for that is the reason he builds a small house. The average individual who builds the small house generally has a certain amount which can be invested and the rest must be borrowed, and there are many who advise that even if one did have the whole amount to invest, it would be better to borrow some for the building operation, and keep out as much as possible for investments in other lines where the money might bring in greater returns.
The problem naturally turns upon where and how much can be borrowed for the building operation. Here again a very personal matter is involved. Some will have very close friends from whom they can secure a large first and second mortgage at a fairly reasonable rate, others may be able to secure a first mortgage from some financing institution which will be an amount equal to one-half the total cost of land and house, and then they may be able to secure a second mortgage from some friend, for most business houses are not prone to take second mortgages. Often a greater sum can be raised on the contract system, for by this method the person lending the money is more certainly assured of securing quick control of it in case of the necessity of action when payments on the interest fail. By the contract method, the individual lending the money holds the deed of the property, and can secure control of the property more quickly than if he had a mortgage and the owner held the deed. In many cases where foreclosure of mortgages are found necessary, there may be a delay of a year or more before the money-lender can secure control of the property, but if he holds the deed the delay is shortened, and because of this fact he is apt to lend more money than 50 per cent of the total value. Of course, in the contract method the owner secures the deed to the property when his last payment is made upon the principle and he has wiped out all of his interest indebtedness.
But probably one of the most satisfactory systems yet devised for financing the small house is through the various building and loan associations which have grown to great strength in this country. These associations not only offer investment opportunities for small investors, but they make excellent and easy terms for those to whom they lend money for home-building. The arrangements with these institutions make the payments on mortgages almost like the payments in monthly rents, and yet at the same time the principle is continually being reduced, so that in about twelve years it is completely paid off. Then, too, one is assured of not being in the hands of some unscrupulous money-lender, as sometimes one discovers a friend to be, however trustworthy he may have seemed before this business relation developed.
These building-loan associations will lend as high as 80 per cent on the value of house and grounds, provided the character of the individual in the community warrants it. Their average-size loans have been computed to be about $4,000. If the minimum payment is adhered to, the loan is usually paid up in twelve years, although arrangements can be made by which this can be shortened. The interest charged is from 6 per cent to 8 per cent.
If the money is not secured through the above source, then it is customary to pay a commission to the agent who secures a loan from some financing institution or private investor. This commission differs, according to the locality, ranging from 1 to 4 per cent on first mortgages, and from 5 per cent upward on second mortgages. If a contract is desired on a second mortgage, the agent will be obliged to secure it from some private individual, for first-mortgage companies will not purchase them. This often leads to discounts of from 15 to 30 per cent on second mortgages and contracts.
It is well for every prospective owner, before he considers financing the construction of a small house, to sit down and figure out all of the incidental expenditures which are connected with it, for often some of the minor items are not taken into account, and they may spoil the whole scheme. Taking a typical example, the items of expense are as follows:
1. Cost of the lot.
2. Fee for title search.
3. Tax search and recording fee.
4. Possibly cost of surveying lot, but not always.
5. Broker's fee for securing mortgage.
6. Interest on each advance of the loan during erection.
7. Cost of the building less the amount borrowed.
8. Architect's fee.
9. Owner's liability insurance.
10. Fee for filing plans in Building Department.