FTC warns homeowners about home improvements
by Tiffany Davis, south news editor

    Homeowners thinking about doing some home improvements this summer may want to think twice.

    Expensive hidden costs can be uncovered once work has begun. In addition, the new-to-Texas home equity loans may not be as convenient as advertised.

    According to the Federal Trade Commission (FTC), consumers who chose to use their homes as collateral for a home improvement loan could lose their homes and the equity.

    The American Association of Retired Persons (AARP) says consumers should be wary of financing offered by contractors because unscrupulous mortgage brokers and home improvement contractors often team up to take advantage of older homeowners.

    The FTC reports some lenders offer loans based on the equity of the house, not the ability to repay the loan. This practice could lead to homeowners’ losing their homes if they cannot afford to repay the loan.

    According to AARP, before dealing with any lenders or contractors, homeowners should decide exactly what they want to improve about their homes and how much money they want to spend improving it.

    After the fact, consumers should pursue bids from several different contractors and find out if and why their prices vary.

    Cheaper does not necessarily mean better. One of the contractors might charge more because he uses a better quality of material than another contractor.

    “There is more to consider than how much the contractor charges,” AARP warns.

    Information from AARP suggests that consumers need to find out if the contractor or representing company is insured against claims covering worker’s compensation, property damage and personal liability in case of accidents.

    The consumer should also make sure the contractor is properly licensed and bonded.

    Homeowners should remember a building permit is usually required when performing structural work.

    “Consumers should check with the respective department of license and permits, and if in fact a permit is required, the contractor should apply for it in his/her name,” according to AARP

    Then, if the contractor’s work does not pass inspection, the homeowner cannot be held financially responsible for any corrections that must be made.

    The contractor is required to tell the consumer about cancellation rights and provide cancellation forms. The consumer should not agree to any work until a written contract is drawn up and signed by both parties.

    The contract should include specific work descriptions, start and completion dates, complete and itemized charges, payment plans, warranties and guarantees, debris removal methods and cancellation agreements.

    By this point, the consumer probably has a good idea of how much the improvements will cost and is ready to select a lender.

    The FTC recommends consumers consult with their attorneys and financial advisors before making any loan decisions.

    It also warns against dealing with lenders who suggest falsifying information on loan applications, pressure people to apply for more money than is needed or consent to unaffordable payments.

    The FTC says people should always read and obtain copies of documents that require their signature.

    The FTC offers tips for protecting one’s home and equity.

    Consumers should shop around for a lender including banks, credit unions and mortgage companies because the costs can vary significantly.

    Next, they should consider the annual percentage rate (APR). The APR takes into account the interest rate, broker fees and certain other required fees that the borrower may not be aware of.

    A rule of thumb is the lower the APR, the lesser amount of money the consumer will have to pay.

    Then, homeowners should find out how long it will take to pay off the loan, the amount of the loan and if the amount of the loan will change anytime during the contract.

    In other words, is there a balloon payment that requires the consumer to pay a larger payment at the end of the term?

    Homeowners should make sure there is no prepayment penalty that requires the consumer to pay extra fees if he/she pays off the loan earlier by refinancing or selling the home.

    If there is a prepayment penalty, the consumer should try to negotiate it out of the loan agreement and, if successful, get it in writing.

    Finally, they should ask each lender to provide a written good faith estimate that lists all charges and fees that must be paid at the closing.

    Written estimates will make it easier to compare the terms from different lenders.

    Both FTC and AARP suggest consumers contact their local Better Business Bureau to learn how long the lenders or contractors have been in business and if any complaints have been filed against them.

    For more information, consumers can visit the FTC website at www.ftc.gov or the AARP website at www.aarp.org/getans/predatorylending.html.