Remodel your home while costs are low

By Josh Garskof,contributorJanuary 25, 2011: 5:30 PM ET

(MONEY Magazine) -- Not long ago, you could have your big remodeling project and get your moneyback too. Owners recouped an average of 87% of home improvement costs at resale in 2005,according to Remodeling magazine.

But by 2010 the magazine had pegged the typical payback at just 60%. Hardly the right time totackle the new kitchen or master bathroom you've been dreaming of, right?

Not so fast, says Kermit Baker, senior research fellow at Harvard University's Joint Center forHousing Studies.

"In many cases, these projects make more sense now than they did at the height of the market," hesaid.

Assuming you like what you can't change about your home -- the neighborhood, the school district,the proximity to things that matter to you -- and you're planning on staying for five or more years,improving your home is a smart move. Here's why.

1. Funding is cheap

The current economic climate sweetens the pot for people on solid financial footing.

"The Fed doesn't want you to save -- it wants you to put your dollars into circulation," said KeithGumbinger, mortgage market analyst at HSH.com.

Today's historically low interest rates mean that most home-equity lines of credit are charging theirfloor rates (your HELOC's probably is around 3% if you've held it for a couple of years, 4% or 5% if

the loan is more recent).

And with the typical bank account and money fund paying far less than 1%, drawing down yoursavings barely costs you anything in lost income -- just don't jeopardize your safety cushion.

2. Eager contractors are discounting

Although the construction industry rebounded somewhat last year, business is still slow. Rememberwhen getting a contractor to call you back was a challenge?

Now the best pros in town will happily bid on your job -- and they'll probably offer you prices thatare 10% to 20% below what you would have paid when real estate was going gangbusters, accordingto Bernard Markstein, senior economist for the National Association of Home Builders.

3. Materials have come down

The cost of building supplies has tumbled too. Plywood is down 23% since its peak in the mid-2000s.Drywall is off 29%, framing lumber 35%.

Not all raw materials prices have fallen that much: Asphalt roofing, which is made from a petroleumbyproduct, is down only 7% over the past two years. Insulation -- which has been in high demandbecause of energy rebates and high fuel prices -- is down a mere 2% since 2006. Still, on the whole,construction supplies are bargains right now.

4. You'll cut your energy costs

You don't have to hire a green builder to see energy savings from a renovation. In a prewar house inthe high-energy-cost Northeast, for example, a standard kitchen remodel could cut your utilityexpenses by $400 a year thanks to new insulation, windows, and appliances.

Even years of such savings will never come close to covering the project's price tag, but think ofyour lower electric and heating bills as an annual dividend.

5. Fixing up costs less than trading up

With the median home price down 22% since 2006, you might think this is an opportune time totrade up for the new master bathroom or other modern feature you want. After all, why not buysomebody else's remodeling headache at a discount.

But you can't assume that you'll easily sell your house in this tough market and then find a new placethat has the exact features you want (and not a bunch of stuff you don't want). And moving remainsfar costlier than improving, said John Ranco, past president of the Greater Boston Association ofRealtors.

For starters, commissions and fees to sell a $400,000 home could run $25,000.

"You can get a lot of remodeling done for that kind of money," said Ranco. "And that doesn't eveninclude the higher price you're paying for the new house, the moving costs, or the inevitablepainting and window treatments the new place will need."

6. You can keep that sub-5% mortgage

As long as you're not underwater and haven't wrecked your credit, you've been able to takeadvantage of recent rock-bottom interest rates to lock in a fixed-rate mortgage below 5%.

Move several years from now, and you'll have to give up that loan, probably for something in thesixes or sevens, said Harvard's Baker. That's not bad, but it could mean hundreds a month in addedinterest costs.

"If you can remodel your way into staying put long term, you can hold on to that once-in-a-lifetimerate," says Baker.

7. Smart projects still add value

In the post-boom era, the rule of thumb for gauging the potential payback from a home improvementis simple: If you're bringing your house in line with similar homes in the area, you'll most likely earnback the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probablywon't.

"Remodeling a 10-year-old kitchen because you don't like its style doesn't pay anymore," saysThomas Collimore, director of investor education for the CFA Institute. "But replacing a 1960skitchen is a different story."

At least for the foreseeable future, buyers will either lowball their bids or pass on your houseentirely unless you've already tackled this kind of deferred renovation.

8. You get to enjoy the results

When it comes time to sell your place, chances are http://longbeachtreeservice.co you'll probablywind up having to do the sorely needed renovations you didn't take care of earlier. Not only doesthat add a huge amount of stress to the process of putting a house on the market, but you still endup spending the http://www.ebay.com/sch/i.html?_nkw=home+repair+and+improvements money(quite possibly when contractor, materials, and borrowing costs are higher).

Why not get the benefits of a new furnace or an updated powder room for you and your familyinstead of buying them for the house's next owners? And why not do the projects soon so you get asmuch time as possible to enjoy the results?

Unlike vacations, luxury cars, or other discretionary expenditures, your remodeling project mightrecoup a significant chunk of its cost someday.

Even so, home improvements aren't purely investment decisions -- you shouldn't redo a kitchen orbathroom in the hopes of making a profit. But if you want to upgrade the quality of your home lifeand you can afford the cost, it's money well spent. Â