We Know: All About Home Improvement Loans

What is Home Improvement Loan?

A home improvement loan is a loan used to make home repairs or improvements. Home improvement loans are tax deductible and are, in essence, a second mortgage, or a home equity line of credit using the home as collateral.

What is a second mortgage?

A second mortgage provides you with a fixed amount of money repayable over a fixed period. In most cases, the payment schedule calls for equal payments that will pay off the entire loan within the loan period.

What is a home equity line of credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

Should I choose a line of credit or a traditional second mortgage loan?

In deciding which type of loan best suits your needs, consider the costs under the two alternatives.

  • Look at both the APR and other charges. Do not, however, compare the APRs, because the APRs on the two types of loans are figured differently: The APR for a traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges.
  • The APR for a home equity line of credit is based on the periodic interest rate alone. It does not include points or other charges.

What is a home improvement loan scam?

A common home improvement loan scam will occur when a contractor who solicits work door to door, offers to arrange financing through a lender he knows. The contractor often begins work before the papers are signed, and then you are either forced to sign quickly or given blank papers to sign. Later, you realize that the papers you signed are for a home equity loan with very high points and interest. In addition, work is often shoddy at best. Of course, the lender has paid the contractor and you have no recourse.

How can I protect myself from inappropriate lending practices?

  • Do not agree to a home equity loan if you do not have enough money to make the monthly payments.
  • Do not sign any document you have not read or any document that has blank spaces to be filled in after you sign.
  • Do not let anyone pressure you into signing any document.
  • Do not deed your property to anyone. First, consult an attorney, a knowledgeable family member, or someone else you trust.
  • Do not agree to financing through your contractor without shopping around and comparing loan terms.

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