Make Sure Remodeling Pays Off

Just a few years ago you could count on getting the bulk of your money back for almost any home-improvement project you took on. Today merely replacing a toilet seat can feel like throwing caution, and cash, to the wind. According to a study from Remodeling magazine, the average return on value for an upgrade declined from 87% in 2005 to 64% in 2009. Here are some rules to help you maximize your return on your remodeling investment.

Rule No. 1: Repairs get the biggest returns

Buyers might appreciate enhancements like Jacuzzis and Whirlpools, but they won't tolerate a house with a leaky roof or antiquated plumbing. And trying to keep problems a secret can cost you big-time. If buyers discover them during inspection, it's now common practice to ask sellers not only to pick up the tab for the repair but also to pay a penalty to compensate the buyer for the inconvenience of having work done.

Rule No. 2: Remodeling beats adding on

McMansions have gone the way of the SUV — and large additions don't pay off either. Having a big, formal living room plus an everyday family room is less desirable than having one multi-use common space. So rather than adding on, you're better off repurposing existing square footage by reconfiguring the floor plan or capturing unused basement or attic space.

Rule No. 3: Eco-friendly upgrades can save cash

Install energy-efficient features, such as EnergyStar appliances and extra wall insulation, and you'll see lower energy bills every month. Add in the federal tax credit of up to $1,500 that lasts through 2010, plus many local rebates and tax incentives, and the work may pay for itself in just five years.

Rule No. 4: Tech infrastructure trumps cool gadgets

Home electronics seem like a deal, since prices have fallen about 50% over the past three years and continue to drop. With buyers seeking any excuse to low-ball their offers, they're not going to reward you for an out-of-date system. Tech infrastructure is different, however. Anytime you're opening up walls for a construction project, have cabling and Ethernet ports installed. At about $80 a room, it's a low-cost way to provide the capability for whatever technologies come along.

Rule No. 5: The new payback time is five years

As with any volatile investment, the longer your time frame, the lower the risk. Don't take on a big project if you're likely to move in less than three to five years. There's just too much chance that any money you put in — aside from necessary repairs or superficial cosmetic work — could be lost while the housing market continues to meander.

But if you plan to stay awhile, don't delay starting a project. Home improvements are a bargain right now, with contractors bidding 10%, 20%, even 40% lower for the same work than just a year or two ago.

Grab them while they're hungry for work and make it clear that you'll be getting multiple bids so they'll be motivated to undercut one another's prices. You'll fulfill the first rule of investing: Buy low. Then hope that when you're ready to move, you can sell high.

Have any other remodeling money saving tips? We'd love to hear them. Just click the comment link below and tell us what you know.

Consumer Protection Agency Plans

A new bill before Congress would establish a watchdog agency to oversee everything from credit cards to mortgage loans.

We welcome your comments, and remind you that email addresses will NEVER be published at our site, so comment without worrying about your email address showing up here.

Home Price Reductions Drop Again

According to a report released by Trulia.com, 21 percent of the homes for sale as of January 1, 2010 have experienced at least one price cut. This makes the second consecutive month that price reduction levels have decreased and the lowest level since Trulia started tracking price reductions in April 2009.

The average discount for price-reduced homes continues to hold at 11 percent off of the original listing price. This was also the second straight month where inventory levels have dropped for single family homes and condos across the United States.

The South has the lowest overall level of price reductions, with 20 percent of current listings experiencing at least one price cut, while the Northeast saw the biggest decrease in price reductions compared to the previous month — 12 percent. (Regions according to the U.S. Census Bureau)

• South – 20% of listings with price reductions
• West – 22% of listings with price reductions
• Midwest – 22% of listings with price reductions
• Northeast – 22% of listings with price reductions

Luxury homes (those listed at $2 million and above) continue to be hit the hardest by price reductions with the average discount rising to 15 percent for the first time since Trulia started tracking in April 2009.

Additionally, luxury homes represent less than two percent of all current listings on Trulia, but are responsible for 24 percent of the $21.2 billion in home price reductions. The average discount for homes priced less than $2 million continues to hold at 10 percent.

FHA Loans: Waiting Will Cost You Big Time

The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions. The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.

With these rule changes, an FHA loan could cost you 10% more to close. That's $25,000 on a $250,000 loan.

3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.

Here is a quick summary of the changes:

• Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
• Decrease seller concessions from a maximum of 6% to a maximum of 3%
• Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.

So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $25,000 on a $250,000 mortgage ($1,250 MIP, $7,500 increase in seller’s concession, $16,250 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $8,750 or 3.5%.

The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud.

These actions will allow them to add to their reserves against bad loans. As a home buyer, these changes will increase your overall costs to borrow tremendously.

Stay tuned, we'll keep you updated on these FHA Loan changes as they become effective.

Repeat Home Buyers Need to Act Fast

We've written about this subject a couple of times before, but it bears repeating now. Repeat home buyers need to act fast to capitalize on the expanded tax credit.

This past November, Congress elected to expand the home buyer tax credit to repeat buyers after seeing the success the temporary financial incentive had on the housing market and overall economy. As a result, current homeowners who will have lived in their home for 5 consecutive years out of the last 8 may now be eligible to receive a $6,500 tax credit.

To qualify for the tax credit, the repeat buyer must have signed a binding contract by April 30, 2010 and close on the home by June 30, 2010. Tax credit eligibility is subject to income limits, $125,000 for single buyers and $225,000 for couples. In addition, the sale price of the home being purchased can not exceed $800,000.

Of course, there is no requirement that existing homeowners must have sold their home to be eligible for the $6,500 tax credit. However, existing homeowners who want to benefit from this incentive to move quickly, particularly those who prefer to first sell their current home before purchasing a new one, need to move quickly. In normal situations, it takes around 3 months or longer to sell a home, and these are not normal times. So acting now is critical, if you hope to secure a buyer for your existing home before purchasing your new home and still fall under the time frame allowed by the expanded tax credit.

If you have questions or comments about this article, please post them here by clicking the "comments" link below. We'd love to hear from you.