Home renovation and remodeling is a $106 billion-a-year business. The fuel that continues to propel this activity is the rapid rise in property values, interest rates continuing to hover near 40-year lows and free-flowing home-equity loans.

 
            Been inside a Home Depot or Lowes Home Improvement Center lately? Even while the economy sputters, business is brisk. Rather than invest money into a stock market that continues to dish out punishing losses, homeowners opt to pump cash into their homes.

            Yet an unhealthy trend is beginning to emerge.
 
RETURN ON INVESTMENT IS SLIPPING

            While homeowners continue to pour their cash and savings into their homes, anyone vying for the attention of a contractor to get their job done will tell you that they have no bargaining power-- demand exceeds the supply of skilled and experienced contractors. Combine this with a "money invested in the house is a sure thing" attitude and the fact that almost any homeowner with a heartbeat can get a home-equity loan these days and you have the makings of undisciplined and excessive spending by homeowners on their remodeling projects.
 

        The following survey results sure paint the same picture:
 
 

PROJECT AND LOCATION MATTER

        According to the 2001 Cost vs. Value Survey by Remodeling and Realtor magazines, while kitchen and bathroom remodeling and family room additions seem to have the best resale value, the cost recovery on sale can vary significantly by region.

            Regardless of what region your home is in, before you decide on any remodeling projects, do your research on what your best options are relative to similar homes in your area. It's wise to tour a few homes during open houses and even visit several new developments to see what features are included in newly constructed homes. Also, visit Remodeling online and review their 2001 Cost versus Value Survey for your region. If you're thinking of selling your home in the next few years, you might reconsider that basement remodeling you were about to jump into.
 

PLANNING PAYS

            Homeowners should approach making a home improvement similar to making an investment and not get swept up in the excitement of a modern addition or updated kitchen. Most home improvement experts agree that the key to a successful home remodeling or improvement project is organization and planning. Define exactly what it is that you want to get done, get quotes and preliminary bids and work up a budget. In short, do your homework before you invest.
 

WHAT TO GET IN WRITING

            If you plan on hiring a tradesman or contractor for your project, it's a good idea to get bids or estimates from at least three qualified professionals. When there is strong demand for home improvement services in your area, this will be difficult to do, but don't skip this step.

            Check references, ask to see similar completed jobs, request to see copies of general liability and workers compensation insurance certificates. Always ask for a written contract before you pay any money or begin work. The contract should include these elements:
 

•     Contractor's name, address, phone number and license number
•     Complete description of the work, including any diagrams and drawings
•     A list of materials to be used in your project
•     Complete costs and a schedule of payments
•     Description of heavy equipment use and access
•     Start date and completion date
•     Process for changes during the project
•     Written warranties for all work and materials
•     Arbitration clause for dispute resolutions

 
        Ask the contractor to obtain lien waivers from everyone who the contractor is responsible for paying. Also, make sure to get a full release and waivers of all materials and mechanics liens upon full and final payment. This is the best way to protect you from being slapped with liens by workers or suppliers who go unpaid by a cash-strapped contractor.

        Contact a local lawyer for a list of specific contract issues or visit Nolo.com for general information and resources. A good contract in advance will save you a lot of potential headaches later.
 

                Although the majority of homeowners pay for renovations from savings, there are several other options to consider for refinancing your project:
 

• Line of Credit: The most common option used is a home equity line of credit. The amount of the credit line is based on the value of the home in excess of the current mortgage amount, so you generally need to have more than 20% equity in your home. The approval process includes an appraisal and loans can be closed in a few weeks. There are usually no closing costs and you can draw the line as needed to pay for the project. The interest rate is often tied to a percentage above the five-year Treasury note or set to the prime rate. Generally, home-equity interest is tax-deductible as an itemized deduction for loan amounts up to $100,000.

 
• Refinance with Cash Out: Consider refinancing your current mortgage with a new mortgage equal to the amount of the current loan and the additional cash you need for the remodel. This makes sense if the interest rate is lower than the old rate and is a good way to lock in your payments. There will be closing costs and the home must appraise within guidelines to allow for the larger mortgage. Compare combined interest costs of the existing loans to the interest cost and refinancing fees for the new mortgage.

 
• Let the Government Help: Homeowners who have little or no cash or equity in their homes have a Catch 22 or sorts. They cannot borrow against their current value because they don't have enough equity, but they would have enough equity if only they could improve their home. The US Department of Housing and Urban Development backs two loan programs for homeowners in this situation. FHA Title I loans are offered by qualified lenders who provide loans for renovations when other banks will not. These loans can be up to $25,000 with repayment terms up to 15 years. Often there is no equity or appraisal required on loan amounts less than $15,000. The interest rate will be several percentage points higher than conforming mortgage or home-equity rates.. 203(k) loans offer long-term, fixed-rate loans based on the expected market value of the home after renovation. This loan allows buyers to purchase a fixer-upper property "as is" and provides the cash up front to perform the necessary work. 203(k) loans also feature down payments of three to five percent. Check out www.hud.gov to find out more.