Financing Home Improvements: The Basics

By: AARP Education & Outreach | Source: AARP.org | March 27, 2006

Americans spend billions of dollars on repairs and improvements to their homes each year. But, if you need to borrow money to pay for this work, it's important to choose where you borrow your money as carefully as you choose who does the work. You need to shop for the best possible loan. Some unscrupulous contractors are more interested in pushing their financing arrangements than in actually doing the remodeling work. Some financing companies are more interested in how much money they can make rather than what's best for you.

Making improvements to your home can increase its value and allow you to adapt it to meet your changing needs. But, there are many financial risks when you use your home as security for a loan. If the contractor doesn't do a good job or doesn't finish the job, you still must repay the loan. If you can't make the loan payments, you can lose your home to foreclosure. Remember, no matter how much money the lender is willing to lend you, always be sure you can afford the monthly payments.

Before you deal with any home repair company, decide what you want done, how much you can spend, and how you'll finance the project. This allows you to accurately compare the costs of the job and the financing.

Be wary of financing offered by the contractor. The contractor may be getting a large commission for the referral. Unscrupulous mortgage brokers and home improvement contractors often team together to take advantage of homeowners. Call several lenders to compare all the costs of borrowing. Promises of low monthly payments may not show the total costs of borrowing money. Before you sign anything, get several estimates for the work. Get separate estimates for the financing.

Get legal or financial advice before you make any loan decisions. Your local Fair Housing Office, Legal Aid Office, housing counseling agency, or Area Agency on Aging may have information and help.

Check with the Better Business Bureau and local consumer protection office (listed in the blue pages of your phone book) before you make your final selections of workers. Always have a written, detailed contract. Never sign a contract or loan with blanks. Never pay in full before the work is completed to your satisfaction. The first payment shouldn't be more than one-third of the total cost.

If you're age 62 or older, consider a reverse mortgage as an alternative to a home loan.

If you think you've been treated unfairly by a contractor or financing arrangement, talk to a lawyer immediately. You have a several legal protections, depending on the circumstances of your agreements with the contractor and lender. If the contractor came to your home to get your business, you have three business days to cancel the contract without penalty. Federal truth-in-lending laws also give you a three-day cancellation for loans secured by your home. You have additional protections if your loan has high rates or fees.

Take Action

• AARP offers extensive information about Reverse Mortgages, a unique alternative to traditional home loans.
• The National Consumer Law Center, a nonprofit legal organization that helps consumers and their lawyers to use consumer protection laws effectively, has an excellent report on lessons learned from Katrina about home improvement fraud.
• Get information about home improvement fraud from the Federal Trade Commission.
• Get a list of where you can file complaints in your state about contractors.
• Use this worksheet when shopping for a home improvement loan to compare costs and terms.