Shopping for a Home-Improvement Loan
Questions you should ask when shopping for a home-improvement loan:
Does the lender have a license to make loans?
A license is not required for Supervised financial institutions such as banks, credit unions, etc. If the creditor is not a depository institution, check with your state's consumer credit regulatory agency.
Are there any closing costs?
Examples of closing costs are loan origination fees and points. Many lenders offer home improvement loans with no closing costs.
What is the interest rate being offered for this loan?
Rates will vary from lender to lender. Look in your local paper for ads for mortgage loans to get current rates.
Could I get a better rate by refinancing my first mortgage?
Maybe. Rates are usually higher for home improvement loans then for first lien mortgages. Refinancing of your first mortgage for home improvements would depend on the rate at the time for first mortgages. If the rates are higher than your existing mortgage rate, don't refinance your existing mortgage; take out a second mortgage for a shorter term.
See Web Site on Second Mortgage Loans & Refinancing.
Is the loan simple interest?
The loan should be a simple interest loan, which means your interest is calculated daily and is based on your principal balance. If the loan is "precomputed," the balance includes the principal balance and the interest for the term of your loan and you get a rebate of the unearned interest upon prepayment in full.
Will the lender finance 100 percent of the home improvement contract?
Some lenders will finance only a portion of the contract; others will finance 100 percent.
Does the loan have a prepayment penalty?
This refers to your ability to make extra principal payments at any time or pay off the loan early without penalty. Read your contractual agreement carefully for any prepayment penalties. Indiana and other states have limits on prepayment penalties on second mortgage loans and some states do not allow them.
Before you consider any home improvements, you should shop around. When you have found an improvement company that meets your needs, call your local Better Business Bureau or ask them for references. Make sure they are bonded or insured. Will they guarantee their work?
When you initiate a conditional contract for home improvements, be sure you understand all of the provisions. Some contracts are not completed until the home improvements are completed. Some contracts are completed when the improvements are agreed upon with payments not to begin until the improvements have been completed.
If you are getting a loan for home improvements, be sure all of the improvements are satisfactory before the funds are disbursed to the home improvement company.
Avoid Being A Victim
Americans who borrow against their homes should be aware that if they fail to make the required payments on the loan, whether because of loss of income, ill health, or because the contractor has failed to complete the repairs as agreed, their home can be taken away in foreclosure. While some companies offering these services are reputable, many others are only interested in how much money they can make and will say and do anything to achieve their goal. They bear little or no risk in these ventures since the homeowner's property is their ultimate security.
There are, however, important steps that a homeowner can take to avoid becoming a victim of second mortgage fraud, which ultimately could lead to foreclosure.
Dealing With Home Improvement Contractors & Finance Companies
- Be especially careful if responding to home solicitations; many solicitors are experienced sales people who can be very skilled and persuasive at selling you things you don't need or want.
- Always get at least two written estimates for home repairs and improvements from professionals of your own choosing. Each estimate should describe the work, the price, the responsibility for cleaning up, and the hourly rate for any additional work.
- Make sure that any contractor you choose is licensed and registered by the appropriate licensing agency.
- Get references for the contractor and speak to those references about satisfaction and any problems that arose; if possible, take a look at work performed by that contractor.
- Read or have an attorney or someone you trust read everything before you sign.
- Keep a copy of everything you sign.
- Monitor all work regularly to be sure it meets contract specifications.
- If you don't want the service being offered, don't let yourself get talked into it, even if you think agreeing would get that person off your back.
- If the contractor or seller tries to get you to sign on the spot by saying it's a one-time offer, don't accept.
- If you have any doubts about whether you need the service being offered, get a second or third opinion and estimate from professionals of your own choosing.
- Never sign a contract or any piece of paper without reading it carefully and fully understanding what it obligates you to do; if possible, get an attorney to review it and advise you before signing.
- Do not make or authorize final payment to the contractor or sign a certification of satisfactory completion until proper inspections are made and you are satisfied with the product.
Financing Home Improvements
To get a loan to finance home improvements, you must have equity in you home. Apply for a loan at a bank first; bank loans are likely to cost less than loan products offered by finance companies.
Avoid going to a lender the seller or contractor refers unless given a choice of lenders who are independent from the seller or contractor; find out if a broker's fee will be paid for this referral and exactly how much.
Be sure you understand your obligations under the loan, especially when you are using your home as collateral, including:
- How much is the total principal and amount financed, and how was it calculated?
- What is the annual percentage rate (APR)?
- How much will monthly payments be?
- What is the loan term -- i.e., how long will I have to pay it off?
- Is there a lump-sum or balloon payment and, if so, for how much and when is it due?
Only sign loan papers after you thoroughly understand and agree to all terms, consulting an attorney, if necessary.
Early Warning Signs
Avoid any lender who:
- Tells you, or requires you to falsify information on the loan application. For example, the lender tells you to say your loan is primarily for business purposes when it's not.
- Pressures you into applying for a loan or applying for more money than you need.
- Pressures you into accepting monthly payments you can't make.
- Fails to provide required loan disclosures or tells you not to read them.
- Misrepresents the kind of credit you're getting. For example, calling a one-time loan a line of credit.
- Promises one set of terms when you apply and gives you another set of terms to sign-with no legitimate explanation for the change.
- Tells you to sign blank forms-the lender says they'll fill them in later.
- Says you can't have copies of documents that you've signed.
What should I do if I signed a contract but have changed my mind?
If you don't think you need the services contracted for, whether you don't believe you got a good deal or it's just not affordable, there might be time left to back out of the deal. Where a home solicitation occurred or if you are financing with a home equity loan, federal and most states' law give you three (3) business days to cancel the contract without penalty. You must cancel in writing and mail the notice of cancellation no later than the third business day after signing the contract. This is know as your "right of rescission."
Upon signing the contract, a cancellation form or notice of rescission should be provided to you by the contractor or lender. If none was provided, simply write a brief letter stating that you wish to exercise your right to cancel, sign, and mail it to the contractor or lender.
See Web Site: Home Equity Loans Three Day Cancellation Rule.
What should I do if I think I am a victim of mortgage fraud?
Anyone victimized by an unscrupulous contractor and/or predatory lender should consult an attorney immediately. An attorney may be able to help by finding defenses against any lawsuit brought by the contractor.
For More Information
Regulation Z which implements the Truth in Lending Act, requires creditors to provide a brochure When Your Home Is on the Line: What You Should Know About Home Equity Lines of Credit, or a suitable substitute, to consumers when an application form is provided for a home equity line of credit. The brochure is available on the Federal Reserve Board's Web Site.