Are you hoping to own your own home some day? You may not have thought much about it yet, particularly if you aren’t married. But sooner or later it becomes one of the major objectives of most families. It’s something that husbands and wives dream of for years before they are able to make it come true; something they plan for, work for, sacrifice for.

For the average family it is the most important financial decision they ever have to make. Their wisdom in deciding it may have a great deal to do with their future happiness. It therefore deserves the most serious consideration they can possibly give it.

How many families of your acquaintance were financially able to buy their homes without going into debt? Probably none; certainly not very many. As most of us know, the common form of debt for the acquisition of a home is through a mortgage on the dwelling. If the buyer is unable to pay it off when it comes due or to keep up the payments, the mortgage will be foreclosed and the house sold. The buyer may lose all or a large part of what he has put into it.

Is it better to buy or rent?

To most people the idea of owning a home has a fundamental appeal. A home is the most tangible and desirable of all possessions. Owning one gives a deep psychological satisfaction that colors one’s whole life.

Home ownership is likewise a good thing from the broader social, economic, and political standpoints. Have you ever noticed that the neighborhoods where people own their own homes are likely to be more stable, more tranquil, than where they rent? Home ownership advances one’s standing with his neighbors. It encourages interest in local good government. It is an antidote for disintegrating influences in our local and national life.

How large a part of the American people own their own homes? The 1940 census showed that 40.7 per cent of the dwelling units in the United States were owner-occupied. You should bear in mind that in the rural areas, the towns, and smaller cities the proportion is very much higher than that. The figure for the whole country is pulled down by the very big cities, where most people live in apartment houses and cannot hope to own their own homes.

Real estate prices in general touched bottom in 1933, and the trend has been upward ever since. During the depression, the old practice of giving second and third mortgages was practically wiped out. Because of governmental action, it became possible to finance the purchase of a home on much easier terms than was formerly the case. In many cases now, it is as cheap to own as to rent, and far more satisfactory. If you are interested, there is a GI Roundtable pamphlet that discusses the subject Shall I Build a House after the War? (EM 32).

But on the other hand

The case is not, unfortunately all one-sided. From 1926 to 1936 there were more than 1,600,000 foreclosures, every one of which shattered someone’s dream of owning a home. When the average man of modest income buys a home with a small down payment, it is difficult for him to foresee how steady his earnings are going to be through the long period of years before the mortgage will be paid off. The must bear in mind that the payments will have to be kept up, whether the times aye good or bad.

He may be transferred to a job in another town, or he may have to move to another town to get a job. In either case he must leave behind his partly-paid-for house. Often he will have to sell it at a price that means the loss of all or part he has paid on it.

Real estate values fluctuate widely over a period of years. There are peculiar trends in area and neighborhood values due to local causes, about which the home owner can do little or nothing.

Then there is the danger of some unexpected family emergency, such as a long, serious illness, placing such a heavy strain on the family income that the payments cannot be kept up.

In the light of all these hazards, one authority on the subject has said that it is unwise to go into debt to buy a home unless you have these three things. (1) A stable, dependable income. (2) A fair proportion of your income not already obligated. (3) A sizable reserve of liquid assets that can be drawn upon in an emergency.

What do you think?

How are you going to pay for it?

Even after you’ve made up your mind to own your own home, another big question must be answered. Are you going to buy a house already built or build one to suit your own taste?

Whether you decide to build or to buy, you are almost certainly, going to have to arrange for a mortgage on your new home in order to be able to swing it. One of the first things you will discover, when you start making the rounds of the lending institutions, is that you must be able to make a substantial down payment.

In fact, you will probably find that the larger down payment you make, the lower will be the interest rate on the mortgage, or, if you desire, you can have a longer time to pay off the principal. This is because the larger down payment makes you a better risk in the eyes of the lending institution.

Probably the best source of loans for veterans who wish to acquire a small home is the Servicemen’s Readjustment Act of June 22, 1944, popularly called the “GI Bill of Rights.” This will be discussed in -detail later. Here it is enough to say that it provides for governmental guarantee of loans for this purpose on very favorable terms.

Are you familiar with the insured mortgage loan scheme of the Federal Housing Administration? If not, that is another possibility worth investigating, for it has already reduced the cost of financing a home for many thousands of families.

Under the FHA plan, for a new house complying with certain construction and location standards, you can get an insured loan up to 90 per cent of its appraised value, if that is not more than $6,000, and for somewhat lower percentages of higher values. The loan is actually made by private lending institutions, such as savings banks and other organizations. But because the lender is protected against loss by the FHA guaranty, the interest rate is lower than it would otherwise be. The rate is 4? or 5 per cent for a loan extending for twenty or twenty-five years.

Fixing up the old homestead

If, instead of buying a new house, you prefer to repair, remodel, or modernize an old one, you should inquire at your bank or other regular lending institution about getting a loan for this purpose which the FHA will insure. FHA-insured loans of this type are made wholly on the character of the applicant, no mortgage or other capital being required. They may not be larger than $3,000, they run from one to three years, and they gradually shrink in size as they are paid off in monthly installments. The interest is expressed as a discount of $? per $100 per year. In other words, on a $100 loan, a man actually gets $95 but agrees to pay back the full $100 during the course of the year. Since the balance of the loan decreases every month the true interest figures out to about 9? per cent.

Eligible veterans will also be able to get loan guaranties under the GI Bill to pay for repair, alteration, or improvement of their present homes.

Where else could you turn?

There are still other possible sources for your mortgage. Some lending institutions will make a straight loan, payable in one payment, either on demand or at a certain future date. For most borrowers these are not desirable forms of loan. They may come due at a difficult time. You may have to pay a premium for a renewal or an extension.

Would you find it easier to pay off the loan out of your income as you go along? Most borrowers prefer to do so, making their monthly payments conform to their income.

Some lenders also permit or require the borrower to pay taxes, assessments, and fire insurance to the lender on a monthly basis, allowing him interest on advance payments.

Then when these items actually become due, the lender pays them. This method of spreading these costs evenly through the year relieves the home owner of many worries.

Installment purchase loans

Installment purchase loans fall into two classes: the sinking fund loan and the direct reduction type. In the sinking fund loan, your monthly payments are put into a fund and invested against the day when the amount accumulated will be enough to pay off the loan with a single payment. The debt remains at its original amount for the whole period. How long that will be depends on the amounts paid in the installments and-on the yield of the investments in the sinking fund. The investment may go “sour,” of course, and if it does the borrower is the loser. You never know just how you stand on this type of loan.

In the direct reduction type of loan, every payment is devoted to three purposes: first to the payment of taxes; then to the payment of the accrued interest; and then to reducing the principal. Thus a payment of $10 a month will pay off a loan of $1,000 at 6 per cent in twelve years and seven months. A loan paid off in this way is said to be amortized.

Because the interest is charged only on the unpaid balance, a larger and larger amount of each monthly payment goes toward reducing the principal.

It is a wise idea for the borrower to stipulate that he can pay off the principal faster than the amortization schedule requires, if he desires to do so. Suppose you should unexpectedly inherit a few hundred dollars? You could use your windfall to reduce the mortgage and thus shorten the period before your home would be free and clear.

The direct reduction loan is cheaper for the borrower than the sinking fund loan. Its maturity and cost are absolutely fixed and the borrower knows every month just how he stands.

From EM 36: Does It Pay to Borrow? (1945)