Economic times say it may be time to remodel

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Economic times say it may be time to remodel

With stock portfolios and interest rates down, it could be the right time to tackle that kitchen or bathroom renovation.

"Improvement yields a reasonable return for your money," said Doug Duncan, chief economist at the Mortgage Bankers Association in Washington D.C. "It gives people the mindset that they're improving on appreciated assets."

Home improvement can raise the value of your house in certain cases - you just have to make sure not to overdo it. Realize that for every dollar you put into your home, you may not get the same amount back when you resell it. For instance, if you have a one bedroom house and the rest of the homes in your neighborhood have two bedrooms, then remodeling can give you a sizable return. But adding several bedrooms may not reap as high returns, experts say.

And real estate is like any other investment - the market can decline.

So far, this hasn't happened. The average home price has risen 28 percent to 2,300 in 2001 from 6,400 in 1996, according to the National Association of Home Builders, or NAHB, in Washington D.C.

Also, sales of new homes rose 0.4 percent in September to 1.02 million compared with the previous month, reflecting strong growth in the Northeast. Existing homes sales rose 1.9 percent to 5.4 million in September.

Low interest rates are prompting home owners to refinance mortgages and then borrow against their home equity to remodel, said Colin McGranahan, an analyst at Bernstein Research.

If you're planning on making home improvements, you should first figure out what type of project you'll be doing and then find a contractor you can trust.

One way to get leads on skilled remodeling professionals is through word-of-mouth referrals or by examining work that's already been completed.

"If you're going down the road and you see a project that looks good, then ask them who did it," said True Davis, the founder of True T. Davis Building and Remodeling in Milford, Mass. "That's the best way. If the guy's a jerk, the customer will tell you."

Before hiring anyone, check to see if your state requires the contractor to be licensed, and if that person meets this requirement. Also, ask how many years the remodeler has been in business, check to see if he or she has insurance coverage, and see if there have been any complaints filed against that person with the Better Business Bureau.

While it is a good idea to meet the contractor in advance, avoid someone who pressures you or tells you that they'll do the job much cheaper if you sign right now.

Kevin McNulty, executive vice president and chief operating officer of National Association of the Remodeling Industry in Des Plaines, Ill., says, "If they're good enough, there's no reason for them to cut their pricing that much. They might not understand what the job requires."

Once you've found a contractor, ask for a cost estimate. This will help determine whether you'll need to take out a loan and what type of loan to get.

A home equity loan is a good idea if you know exactly how much you'll need and want to borrow the entire amount at once and pay it back later, usually at fixed interest rates.

But consider a home equity line of credit if you have an ongoing project and you don't exactly know the cost over the long term. This will let you draw down on funds as you need them, without having to pay interest on the amount that you don't need. The interest rate on this loan typically varies with the prime rate. The national average for a ,000 home equity line of credit is currently at 4.90 percent.

Cash-out refinancing is also appealing right now. With this method, you would refinance your house and replace the old mortgage with a higher-amount, lower-interest mortgage. You could then borrow against the house to finance home improvements.

On home equity loans and lines of credit, interest is usually deductible up to 0,000, regardless of whether you use the funds to make improvements to your house. As a result, many people use this money to pay off their credit card debt or to buy cars. But you should be aware that if you default on these loans, you could lose your house. Interest on mortgage loans is generally also deductible, up to million, but only if you use it for buying, building or improving your home.

One more piece of advice: Always get everything in writing, whether you're signing an agreement with the lender or the contractor. This way, you'll avoid misunderstandings later if something unexpected happens.