Wishes vs. needs
How necessary are the improvements you want? Some home projects may end up costing you more than the value they provide. 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.
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.
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. But then the real estate market collapsed , leaving many people owing more than their homes were worth.
Lenders are more cautious now and demand stringent income documentation and have reduced the debt-to-value percentage they will allow. So now, even if you have excellent credit and significant home equity, it may be more difficult to find such financing.
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.