Most families who buy a home must pay for it out of their own savings.
Usually it is desirable for them to possess, free from obligation, at least one-fifth, or 20 per cent, of the value of the house and lot in cash. While arrangements often are made for a purchase with less, a larger cash payment helps to insure a loan at a low rate of interest and one that can be comfortably paid off.
. In rapidly growing cities with increasing land values, the risks taken by lenders are not so great, and it is generally easier to borrow up to a larger percentage of the value of the property bought, although for the purpose of a home an increase in land values may be of no advantage, since one result is to increase taxes. After the first payment is made, a family should be prepared to devote a certain amount of current savings toward paying off the loan at regular intervals.
It is necessary to determine how much money can be set aside to carry out the plan. Economy and saving are necessary. What present expenses can be cut down? A definite plan for the future will best furnish the basis for a division or "budget" of one's income. One way is to make a table of the regular monthly expenditures, with the amount necessary for each item, by the week, month, or year. The budget thus made should be given a fair trial, and each item made to come within the limit set for it. If funds are being continually borrowed from one purpose to be spent for another, the budget loses its value.
Savings should be placed where they are fully safeguarded, yet yield a fair rate of interest. In general, it is well to have them in a financial institution which loans money on real estate, for preference in loans is often given to stockholders and depositors. Building and loan associations usually lend most of their available funds on real estate, particularly to home-owners, and at the same time they pay a fair rate of interest to depositors. Some banks, especially savings banks, loan largely on real estate and maintain a real estate department for that purpose.
Ingenious schemes are used by dishonest companies to attract savings from the unwary home-seeker. Some promise high dividends to investors, and also the chance to obta'n loans below the market rate of interest. Such schemes are obviously not to be trusted.
A number of concerns advertise loans at a low rate of interest, when it really turns out that interest is still charged on the full amount of the loan even after half or three-quarters of it is paid off. This makes the real rate very high. In some excellent building.and loan associations, however, the nominal payment of interest at a fixed legal rate on the whole amount results in quicker retirement of the loan.
Certain "loan trusts" that are run for the profit of the promoters have advertised that they will lend money to home-buyers at 3 per cent. But they pay no interest at all to depositors who are lured in by doubtful promises of the chances of obtaining "cheap" loans. This method is unbusinesslike. The first few customers, often "insiders" representing the promoters, may obtain loans cheaply. But they do so only at the expense of later depositors who may receive no interest at all on their deposits for years, and who may not be able to borrow when they need funds, or before the company goes out of business. Such a company, as has been said, borrows money from its depositors and pays them no nterest; it lends the money at 3 per cent. Thus, as long as it operates, it absorbs three times as much for expenses and profit as an ordinary well-run building and loan association. Many sound organizations of the latter type, for example, pay 5 per cent interest on deposits and lend the money out again at 6 per cent, retaining only 1 per cent as a charge for doing business.
In every case an investor should note whether he will receive a fair rate of interest if he should discontinue payments or withdraw his deposits at any time; this should not bring a severe penalty. Plans which propose to profit by the inability of any person to make payments are essentially unsound.
It is a safe rule never to invest money in the stock or security of a concern unless the management is in the hands of men known to be capable and honest. High rates of interest and the safety required for investment of savings intended for home-buying usually do not go together. American people lose several hundred million dollars of their savings each year by purchasing worthless securities promising large returns.