Last Updated: August 23, 2010
It's not a bad time to start budgeting for home improvements. Federal, and in some cases, state economic stimulus dollars are still available on a host of projects and appliances that might add value to a home and over the course of time may save money.
The bad news is that paying for these improvements may be tougher since consumer and residential lenders are being tougher on borrowers who may have spotless records but find their home values depressed to the point where they can't get financing to cover larger projects. For individuals in that situation, it may make sense to prioritize projects over a period of years and check in with a tax adviser or financial planner to get guidance on finding money and being generally careful with borrowing options.
Here are ways to prepare for these projects:
- Check those federal tax credits: The Obama Administration has extended many of the energy-related tax credits for structural projects and appliances into tax year 2010, so make sure you check the Energy Star Web site to see the latest summary of tax credits and other incentives to improve your home.
- Keep an eye on the neighbors: It never hurts to take a close look at the work other people in your immediate community are doing on their homes. It's a good way to see if there are state and local incentives for certain renovations. And on a ground level, it's a good way to see which local contractors do the best work on a particular kind of project.
- Invest in a professional home inspector: If you've owned a home for a number of years and might want to sell once home values recover, it might make sense to get a trained set of eyes on your property as a whole. A trusted realtor, bank officer or friends and colleagues who have recently bought or sold property might know the name of a certified property inspector who can issue an objective opinion on the need for structural repairs and the state of installed appliances to give you an overall priority list. This advice might cost a few hundred dollars, but they are trained to spot emergencies that should be dealt with ahead of aesthetic projects. You can also tap the inspector's knowledge of costs as well as how to solicit bids and supervise the work that's being done. Also, you may get a better view of projects you can do yourself based on your own skills.
- Do your own credit inspection: If you want to be in a better position to borrow now or in the future, keep your credit record clean and do as much as possible to lower your debt since ratings agencies are looking at overall borrowing levels more closely than ever. Start by checking your credit report — you have the right to get all three of your credit reports from Experian, TransUnion and Equifax once a year for free. You can do so by ordering them at AnnualCreditReport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior — late bills or heavy credit card debt — clean it up before you wander back into the real estate market. Remember that a bad credit score can raise the total cost of your mortgage.
Check those federal tax credits:
- Measure the payoff of various projects: During the housing boom, people thought virtually any renovation would offer big returns. That wasn't true then, and it's particularly untrue now. Take the time to figure out what renovations have the best chance for return on investment now — read Remodeling magazine's annual Cost vs. Value online report and check project cost averages for your region of the country. Just keep in mind that the days of reaping big profits from renovations are over for now. Renovate because it's going to bring a practical benefit, not a windfall.
- Focus on your property taxes: Many homeowners are getting two particularly bad pieces of news these days. First, that home values have fallen and they might owe more than their homes are worth. Second, that cash-strapped communities aren't rushing to lower taxes based on that loss of value. That means homeowners will need to go on the defensive — it's time to learn how to appeal your property taxes if you have never done so. Also, once is not enough — get in the habit of appealing every time you're reassessed.
- Don't forget to deduct applicable sales tax: If sales tax was imposed on a major renovation or if your state or locality imposes a general sales tax on the sale of a home or the cost of a substantial addition or major renovation, you might be able to deduct it. This alternative is particularly valuable in low-tax states, and the sales tax paid on the purchase of some large items including the purchase of a home or major addition can be added to the table amounts.
- Make sure your renovation makes your home salable: A discussion with a real estate agent or someone familiar with the value of improvements in your immediate neighborhood can tell you what will add to value or take it away. For instance, a big addition can take away from the value of a home if it's not aesthetically in tune with the rest of the neighborhood. Obviously, any renovation that keeps your house on the market longer better be worth it now because it might damage your sales prospects later.