Question: I would like to know how to negotiate a loan for a home-improvement project and to follow through on the contract.
Answer: Many home-improvement contractors have working relationships with lenders, but you should also check with several lenders.
Usually, it is wise to contact your own bank, particularly if you have had previous loans there. They usually have two types, home-improvement and home-equity loans, both secured by a second mortgage on your home. On home-equity loans the bank has no interest in how you spend the home-equity loan funds, but they may be slightly more expensive than second mortgages.
Savings and loan institutions and thrift companies also have home-improvement and home-equity loans. The rates may vary greatly, and shopping around is advisable. You should also consider the respective benefits of a guaranteed interest rate versus a variable rate.
The third type of lender is the mortgage company. These firms usually charge higher interest, and their consideration is not so much your ability to repay, but the value of the property.
Remember that the number of points (percentage points that are taken off the top in order to make the loan) will be a consideration in the total cost of the loan. Shorter-term loans usually are less expensive. However, you can always prepay a portion of the loan.
Often the person who negotiates your loan will try to sell you credit life insurance. Usually, this is very expensive, and you can buy comparable life insurance at much lower rates from your insurance agent.
Once you have signed the contract with the home-improvement contractor, you should decide how the funds will be administered.
Some lenders will require that the funds be put into an escrow account or fund control to be disbursed during the course of construction. There is usually a fee for this, but a great deal of protection is given to the homeowner because the fund disbursement service will usually only issue checks based upon release of liens from subcontractors and from employees, to protect the homeowner.
Normally, I would advise that you should select the disbursement firm or have the bank select one.
The law in California limits up-front payments to home-improvement contractors to 10% of the total project unless the job has been bonded with a payment and performance bond. A payment and performance bond protects you if the contractor does not meet his obligations or abandons the project.