Navigating contracts:

Columnist explores home-remodeling deals, mortgage questions

It’s usually better for a homeowner who wants to remodel to sign a fixed-price contract with the company that will do the work, rather than a cost-plus deal, which gives the contractor more leeway to raise the bill.

Q. We are planning to remodel our home, and the contractor we like best says we should agree to a cost-plus contract that would call for us to pay for the contractor’s building costs and then allow him to tack on an extra amount at the end of the project for his profit and overhead. We have done several remodeling projects before but have always signed a contract based on a fixed price for the jobs How do cost-plus deals work? Are they good for the homeowners, or do they benefit the contractor?

A. Cost-plus contracts usually work in favor of the builder or remodeling contractor, rather than the property owner.

Under a typical cost-plus deal, the contractor (rightfully) gets paid for the materials needed to perform the job but also gets to negotiate his profit margin. This can save the homeowner money if the contractor keeps costs under control and accepts a modest profit margin but can prove disastrous for the owner if, say, the cost of lumber or even tile for the job suddenly goes up.

There are actually several types of cost-plus contracts. The worst is probably the “cost plus a percentage of cost” deal, which requires the owner to pay an even higher fee if expenses are more than expected. If you sign such a contract, there’s no reason for an unscrupulous contractor to keep his prices under control: The more he charges for labor and material, the more profit he will make.

Most people who are remodeling a home or building a new one would probably be better off choosing a fixed-price contract that they know they can afford instead of gambling that their job will come below a contractor’s cost-plus proposal.

Q. We are behind on our mortgage payments. If we sign a quitclaim deed that gives our ownership interest in our home to a private investor, would we still be required to make the monthly payments?

A. Yes, you will, unless the investor is approved by your lender to take over the mortgage payments by himself.

To illustrate, let’s say your home is worth $250,000 and that the outstanding balance on your loan is $100,000. If you merely quitclaimed the deed to the investor, he would get both your house and the $150,000 in equity — but you would still be legally obligated to make the monthly payments.

Q. The bank that financed my home and issued my primary credit card recently failed and was then purchased by another bank. The new bank has now sent me a letter stating that the rate on my credit card is going up. Is this legal? Also, does this mean that the new bank also can raise the rate on my fixed-rate mortgage?

A. Federal law allows all banks to raise the rate on credit cards, provided that the issuer gives its customers at least a 45-day notice, so the rate hike on your card is perfectly legal.

The good news is that federal banking laws prohibit the new bank from making any major changes to your home loan. The bank cannot change the terms or payments on your fixedrate mortgage, although the bank will be allowed to change the address to which your monthly checks must be mailed.

Q. We are confused about some comments you recently made about living trusts and how they can save money. If my husband and I create the type of inexpensive trust that you recently wrote about, would we be the “trustees” or the “beneficiaries”?

A. You and your spouse would be the trustees. Your beneficiaries would be the people or group that you want to inherit the property after you die.

Although most folks name their children or other relatives as their beneficiaries, others choose to leave their assets to a church, college or other nonprofit organization.

Regardless of which beneficiary (or multiple beneficiaries) you choose, forming an inexpensive trust now could help to ensure that your heirs will not have to go through the costly and time-consuming probate process, which can gobble up much of an estate left by those who die with a common will.