If you're planning a major home improvement project, you probably will need a loan to pay for the work. Before finalizing any contracts, check out your contractor and lender thoroughly and be on the lookout for common home improvement loan scams.
A 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.
Some contractors and lenders, often working together, are more interested in scamming you than in helping you get your project finished.
One 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:
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.
Another 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.
Use these tips to avoid being scammed.
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.