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When does home remodeling make financial sense?

By Jason Alderman

My wife and I survived two major home remodeling projects and we've got the battle scars to prove it. Like most people feeling cramped for space – thanks to two growing children in our case – we weighed the plusses and minuses of remodeling versus moving to a larger home. Because we live in a great neighborhood with strong local schools, we ultimately decided to stay put and remodel, but everyone's case is different.

Here are a few considerations to weigh before you decide to remodel:

Wishes vs. needs. How necessary are the improvements you want? The days when many improvements paid for themselves in increased home value are over for now, especially such strictly cosmetic upgrades as new kitchen cabinets or a bathroom skylight. That doesn't mean certain projects aren't worthwhile. For instance:

  • Repairing a leaky roof or faulty plumbing might spare you from water or mold damage.
  • Installing attic and wall insulation and energy-efficient windows or replacing older appliances and light fixtures will lower utility bills and may be tax-deductible (visit www.energystar.gov for information on tax credits and rebates).
  • The IRS allows tax deductions for certain home improvements to accommodate medical conditions or disabilities with a doctor's recommendation. The rules are complex, so read IRS Publication 502 at www.irs.gov and consult a tax advisor before proceeding.

Budgeting. Gather cost estimates for each job or item and create a chart with columns for high-, medium- and low-cost options. Don't forget supplies for do-it-yourself projects and always add an extra 20 percent or more for unexpected expenses. If contracted labor is involved, gather three estimates and carefully check references and business licenses. Also, ask about discounts for grouping multiple projects together.

Financing options. Ideally, you've already established a home improvement savings plan. But if you're planning to borrow, proceed with caution. Just a few years ago, home values were skyrocketing and many people took out a home equity loan (HEL) or line of credit (HELOC) to tap their home's equity.

The real estate market's collapse left many people owing more than their homes were worth, so now even folks with excellent credit and significant home equity have difficulty finding such financing. Lenders now demand stringent income documentation and have cut back on the debt-to-value percentage they will allow – only 60 or 70 percent or less of the appraised value in some hard-hit areas. So if your existing mortgage is over that amount, you may be out of luck.

Comparison shop. First, ask if your existing lender offers HELs and HELOCs. If so, compare their interest rates, fees and qualification criteria to what other lenders are advertising. Bankrate.com has home equity rate comparison tools for both banks and credit unions (www.bankrate.com/home-equity.aspx and www.bankrate.com/funnel/credit-union); but be forewarned, pickings are slim right now. You might have better luck talking directly to lending officers at local branches.

One important caution: HELs and HELOCs are considered secured debt in which your home is used as collateral for the loan. If you miss payments or default, you could lose your home. If you're not certain you'll be able to make the payments (worries about unemployment, prolonged illness, etc.), it's probably best to forego remodeling until you have sufficient savings.




This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and about your individual financial situation.

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