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Housing Loan Facts for First Time Homeowners

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The promise of low down payments and easy payment terms can encourage a lot of people to buy a house. Find out what to expect before applying for a housing loan.

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Housing Loan Facts for First Time Homeowners

  1. 1. Financing the House Photo owned by Daniel Case The financing is an important part of buying a house. Do not be misled by low down payments. Although two hundred dollars moves you in, just how deep are you in? Some people get in a lot deeper than they expect to. Read all the fine print in the contract before signing. How large are the monthly payments? How many years do you have to keep up the payments? Are the payments arranged to include the taxes and the fire insurance, as well as the principal and interest? What is the interest rate? Can the entire amount be paid up at any time? When you sign up to pay $114.00 per month for 25 years, remember that 25 years is a long time to make payments. Sometimes people have to continue renting because they can't get enough money together to make the down payment. Where do people get building money, anyway? Most of them borrow it. Ordinarily you can't borrow very much, unless you have some money of your own to start with. There are two ways to get money together. One way is to earn more; the other is to spend less. At first glance earning more might seem to be the better, but since
  2. 2. most people spend up to the limit of their earnings, actually the only way to save money is to spend less. This is often difficult, but seldom impossible, if people really make up their minds to hang on to their money to get enough together for a worth-while project like getting a house. If you postpone spending money as long as possible, often the need for spending it passes, and the money can be left in the savings account. Incidentally, money kept in the purse or around the house will always get spent somehow. The only way to get money together to start building a house is to save it in a bank. It is very difficult to get a loan unless you have the lot paid for. Even if sometimes you might borrow from a rich relative, often the thing that made him rich prohibits him from lending it to you, that is, his good business sense. If for some reason or in some way you come into possession of a few hundred dollars, don't fritter it away, or buy a new car; go out and buy a good building lot with it. If you later decide not to build, you can sell the lot, usually at a handsome profit. During the last hundred years, money invested in good land has increased in value faster than almost anything else, when it comes to the long steady pull. Land has always proved to be a good investment, and as the population increases, it becomes scarcer owing to the increased demand and should go up in price. Be sure to select your location with care, usually in the direction of growth. Poorly located land may decrease in value. If you have a few hundred dollars or a lot paid for, you can usually borrow what money you need to solve your housing problem. Interest is in the neighbourhood of six or seven percent, and the trend is toward higher rates.
  3. 3. Often since it is not possible to borrow enough money on a first mortgage, or trust deed, to do all you want to do, a second mortgage is necessary. This second mortgage usually runs from three to five years, whereas the first mortgage runs from ten to twenty-five years or more. Interest rates are usually higher on the second mortgage, and because it also has to be paid off in much less time, the monthly payments are much larger compared to the amount of the loan than is the case with the first mortgage. Most of these loans are amortized; that is, they are arranged so that the monthly payment covers the interest and a small part of the principal. Then as the principal is gradually reduced, the same monthly payment pays less interest and a larger part of the principal, so that near the end of the twenty-five-year period, practically all of the payment goes to finish up the principal. At the end of the time the house is fully paid for by the regular monthly payments. Sometimes the payments are also made to cover a certain amount for taxes and fire insurance. Getting the Loan When you have completed the plans and the specifications, take two copies of each to the loan company, explain your financial set-up to them, and ask for a loan to build the house. They may require that you get a bid from a reputable contractor to give them an idea of the actual cost of the proposed construction. If you apply for an FHA loan, you should have previously procured a little booklet setting forth the things they require in a house before it is eligible for such a loan.
  4. 4. Many people, underestimating the cost of the building, do not arrange for enough money to complete the job. Nothing is much more perplexing and discouraging than to get the house as far along as the completion of the plastering and not have money enough to get it near enough to completion so that one can move into it. While you are still paying rent at the old address, the payments are starting on the new house, and you can't use it. So be sure to arrange to borrow enough to complete the job. If you do not need all you have arranged for, you are not required to take it, but maybe you could use a little extra for carpeting or furniture or equipment. Some loan companies do not like to lend on a house before it is built, but when they do make the loan, it may be on better terms than some others. It is sometimes possible to get a tentative commitment on a house, and then get a short- term construction loan from the bank to build the house. Then the loan company will appraise the house and make the long-term loan, paying the bank what it has advanced. You then start paying the monthly payments to the loan company. Loan companies are understandably cautious about lending money with which to build when the construction is not to be done by professional craftsmen working under the direction of an experienced contractor, but money can usually be found by a little diligent search in the right places. When you go to apply for your loan, be honest with your loan company and give them a true picture of your financial condition, so they can give you sound advice regarding financing your projected building operations.
  5. 5. There are people who have money and who are looking for the opportunity to lend money on good houses. Perhaps you can get acquainted with one of them. How much can a person borrow on a house? Many loan companies will loan 60% to 70% of the value of the house and lot. Sometimes it is possible to get a loan equal to 90% of the total value of the place, but these are hard to get. A house is such a large investment that although most of us can't avoid borrowing money with which to build, we want to keep the payments as small as possible and to get them over with as soon as possible. If you can get a mortgage paid off in ten years, you will save a lot of money over letting it run for twenty years. If you buy a house already built in a tract or subdivision, all these details are already taken care of, so all you need to do is to establish your credit, make the small down payment, and move in. If you want to build your own house, you will need to arrange your own financing. Should a relative or friend lend you the money with which to build, do this on a business-like basis, with the proper papers signed to avoid later misunderstandings. It is a big mistake to borrow money from several sources; get it all from one place and save many headaches. If you do not want to go into debt so deeply, you can sometimes build on the installment plan instead of paying for it that way. With a kitchen, bedroom, bath, and one other small room, many families can be quite comfortable; then as funds become available, the rest of the house can be built.
  6. 6. The plans for the whole house must be complete before any part of it is built. Otherwise, an awkward situation is sure to develop. You can plan a good house, and build half of it, but you will find it difficult to build a small house and then make a large house out of it later. Plan the complete job. Then build enough of it to get along in until you can build the rest. In fact, in any planning, it is well to arrange things so that enlarging the living room or adding an extra bedroom will not be too difficult. The cost of a house is not entirely dependent on its size. The cost of the plumbing, the wiring, the heating, and of the doors and windows would not be materially affected by a slight increase in the size of the rooms, but if the size increases too much, then one begins to add another bathroom and more and larger windows; of course, the cost goes up. Do not have too much space, but have it well organized. It is usable space that counts. If a space can be used for more than one purpose, that is good economy. There must be enough space, however, to carry on the family life without one activity encroaching too much on another. One of the things that makes modern houses cost so much more than their previous counterparts is the fact that so much more mechanical equipment is now included in a house than was formerly the case. Moreover, most modern houses today come with sophisticated security devices that can add up to the total cost of the house. I remember a house built in our community in 1907. It was one of the first plastered houses in our part of the country, but it had no bathroom, no electrical wiring, no furnace, no concrete foundation, no gutters, no garbage disposal, no
  7. 7. garage with automatic doors, no electric doorbell, no radio, no television aerial, no fireplace, and no central vacuum cleaning installation. With all these things and many more added to the house, the cost had to go up; then with inflation the way it is, the price of a house is following in the wake of the "cow that jumped over the moon." With building costs soaring, many people are finding that the only way they can get the house they want is by building it themselves. Legal Liability of the Owner In any work, whether by contract or not, remember that the owner is legally liable for all that is done. If you hire a legally licensed contractor, making sure that he carries the proper compensation insurance, and making sure that all the sub- contractors also carry adequate compensation insurance, you are then reasonably safe from lawsuits arising from the building work. Insurance Never employ help unless you are covered with compensation insurance, either state compensation or from a private company. In case someone gets hurt on your job, it is your liability no matter whose fault caused the accident, or what happened. It is more unsafe to hire help without proper insurance than it is to drive a car without public liability and property damage insurance. It would be well, also, for the owner to carry some kind of home owner's insurance in case neighbour’s children or others not a part of the contractor's group, come on the property and accidentally get hurt. Lawsuits are so easy to get involved in these days that proper insurance is really essential.
  8. 8. It might be wise for anyone beginning to build his own house to take out an accident policy on himself, if he intends to do much of the work, in addition to protecting himself from lawsuits as suggested above. The cost of insurance is negligible compared with the risk one takes without it. It is customary to take out fire insurance on the building when enough is built so that a fire could cause major damage. This insurance should be taken out at least as soon as the roof is in place, better if taken out sooner. In some places, some companies give an extra three months' insurance if a three-year policy is taken out early in the course of the construction, 39 months for the price of 36. It does not take much of an injury nowadays to be worth a lawsuit of $10,000 and a really serious injury can well cost an owner $50,000 or more. Juries are inclined to be very sympathetic toward an accident victim and to be rather liberal with the money of the insurance companies. As they are not allowed to be told whether you are insured or not, they assume that you are carrying insurance. Be safe and carry the necessary legal protection. In some places a department of the state handles all the workmen's compensation insurance; in others, private insurance companies may operate in the compensation field. Find out and be legally protected against all lawsuits arising from accidents or incidents of your building operations. The cost of compensation insurance for the entire job probably wouldn't be more than $40 or $50, and it doesn't pay to take a chance.
  9. 9. Contractors and sub-contractors are supposed to carry their own compensation insurance, but it is well to inquire into it before you let them start to work, as you are liable for anything that happens on your job. If they do not carry the proper insurance, then you should carry it, or not hire them; find someone who is properly insured. Building Permit Most cities and many counties require that you get a permit before you start building. You will furnish the licensing agency two complete copies of the plans and specifications, when you apply for the permit. The permit is not difficult to get if your plans are complete and meet certain minimum requirements. Before you complete your plans, you should secure from the building department a little booklet or a folder of typewritten sheets giving the building requirements in your district. Then you can draw your plans so that they give the necessary information. The usual requirements include:  Floor plan showing all dimensions, plumbing fixtures, light fixtures, window and door sizes, and the use of each room.  Foundation plan showing size of foundation and footings.  Roof plan showing hips, valleys, and slope of roof, and the kind of roofing material.  At least two elevations, the front and one end. Cross-section showing how to house is to be built.  Plot plan showing how far the house is to be from the street, the distance from the lot lines on the sides, the sewer lines, the septic tank in case there is no sewer, where the water pipe comes in, where the gas meter is located, and where the electric service enters the building.
  10. 10. If you have a little time but not much money, then you will have to build the house instead of paying someone else to do it. This reproduction is brought to you by Omega Security Solutions. If you're looking for home security products, stop by our website.

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