Home Improvement Loan BasicsA home improvement loan is usually a home equity loan that you plan to use to make repairs or improvements to your home. Your equity in the home (its value minus your current mortgage) serves as collateral.
The interest rate on a home improvement loan is usually low and interest payments may be tax deductible, making it an attractive option. On the other hand, you may have to pay closing costs, just like a mortgage, and the lender can foreclose if you can't make the payments.
Common Home Improvement ScamsSome contractors and lenders, often working together, are more interested in scamming you than in helping you get your project finished.
Contractor financingOne of the most common scams involves getting financing from your contractor. The contractor will offer you a special deal on certain projects. Often this offer comes out of the blue and is supposedly good only for your neighborhood for a limited time.
The contractor makes the offer more attractive by offering in-house financing or recommending a lender who will also give you a good deal. The paperwork for the financing may:
- Be due immediately in order to qualify for the special terms
- Involve a lot of confusing forms
- Contain a lot of fine print
- Have blank spaces that the scammer fills in later, often with much different terms than you thought you'd agreed to
This rushed mess serves to hide the true terms of the loan, including the fact that your house is collateral. The scammer hopes you will sign a contract you can't afford, and when you default, the lender takes your house as payment. The contractor does as little work as possible on the project that started the whole thing.
Upfront FeesAnother scam that contractors may use is to ask for a large down payment, often as much as 50%. He may also require final payment before the work is finished. The contractor does as little work as possible before disappearing with your money.
When used along with the financing scam above, this scam may encourage you to get a larger loan to be sure you can meet the payment schedule. It also allows the contractor to get as much money as possible and the lender to get your house.
Protect Yourself From Home Improvement Loan ScamsUse these tips to avoid being scammed.
- Never sign any loan paperwork that contains blanks
- Don't sign a contract you don't understand
- If the contractor or lender pressures you to sign quickly, walk away
- Always compare loan terms and interest rates with several banks before agreeing to any loan
- Make sure you know the proposed monthly payment and only sign the paperwork if you are sure you can afford it
- Don't agree to a construction contract that requires more than about 15% down payment
- Make several small payments after specific projects milestones are done, not at specific time points
- Reserve an amount equal to the down payment as a final payment for after the work is finished and cleaned up
It's not always easy to know whom to trust, but if you negotiate a fair contractor agreement, get financing on your own, and pay attention to warning signs, you can avoid most scammers.