Whether you've just bought a fixer-upper and need to do some renovations, you're trying to make room for a growing family, or you just want to increase the value of your home by remodeling, you have several options for financing the improvements. Before you approach a lender, make a detailed plan of the work you want done and get bids from several contractors.

Whenever you use your home as collateral, as in a mortgage or home equity loan, you risk losing it if you can't make the payments. That's why it's so important to get detailed, accurate cost estimates from reputable, experienced contractors. If the contractor's work is incomplete or shoddy and you have to hire someone else to finish or fix it, you still have to repay the loan.

Shop for financing at established financial institutions and compare rates and fees from several different lenders. Contractors sometimes offer to arrange financing with a particular lender, but it may be best to steer clear of these arrangements unless you have the time and inclination to research them thoroughly. The contractor usually receives a commission from the lender for the referral and you can end up paying for it in higher interest rates or fees you wouldn't incur at your local bank or credit union.

The Best Way to Find a Contractor

Try word of mouth — ask friends, neighbors, and coworkers who have remodeled or made home improvements. Who did they use? Were they satisfied with the results and the costs? Once you've identified several possible candidates, check them out with the local Better Business Bureau or consumer protection agency to see if they've had complaints filed against them and, more importantly, whether they resolved any problems satisfactorily.

Get at least three detailed written estimates that spell out exactly what will be done, the type and quality of materials that will be used, and the cost, based on your written description of your project. Compare the bids carefully and make sure you understand any significant differences between them. Don't automatically choose the lowest bid without discussing each bid with the appropriate contractor so you can determine why they differ. If a bid is significantly lower than the others, you may want to toss it out. The contractor may be bidding inferior materials or planning to take labor-saving shortcuts that compromise the quality of the work.

Once you've chosen a contractor, ask for the name of his insurance agent and call to verify that he carries workers' compensation insurance and coverage for property damage and personal liability in case of accidents. You don't want to be held financially responsible if a worker is hurt on your property. It's also a good idea to call your state and local government and find out if contractors have to be licensed or bonded. If they do, check to make sure the contractor has complied.

The Payment Schedule

Never pay a contractor the entire cost of the project up-front. He'll probably request a down payment, the amount of which may be limited by state law. Try to keep the first payment to no more than 10 to 20 percent. Additional payments should be tied to completion of measurable milestones, so you're paying for the work that's actually been accomplished. Include these milestones in your contract to ensure that your contractor understands and agrees to them. You should be holding at least 15 percent of the contractor's money until the job is finished to your satisfaction and you have written proof that all subcontractors and suppliers have been paid.

Mechanic's Liens

One of the biggest concerns about hiring a contractor who uses subcontractors is the possibility of what's known as a mechanic's lien. If the contractor doesn't pay his subcontractors or suppliers, they can demand payment from you directly even though you already paid the contractor for their services or supplies. If you don't pay, they can place a lien on your home and force you to sell it to pay them if you can't come up with the money any other way. Never settle for a contractor's promise that he'll pay everybody.

You can protect yourself by asking your contractor to provide lien waivers or lien releases from all his subcontractors and suppliers before beginning work. A lien waiver is a simple form that the subcontractor signs stating that he won't ask you for money you've already paid the contractor. If the subcontractor won't sign a lien waiver before performing the job, you could meet with the contractor and subcontractor together and write a check to each one separately. Then get the subcontractor to sign a lien release, which is similar to a lien waiver but states that the subcontractor has been paid.