6 ways to ensure a remodeling project pays off.

(Money Magazine) -- 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. But these six new rules will help you maximize your return on your remodeling investment.

Rule No. 1: Repairs get the biggest returns

The smartest money now goes into "undeferring" needed maintenance. That's because while buyers might appreciate enhancements like Jacuzzis and Sub-Zeros, they won't tolerate a house with a leaky roof or antiquated plumbing. "If a property is known to have issues, today's buyers won't even look at it," says Austin real estate appraiser Jim Amorin.

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.

So the $20,000 you saved by putting off a roof repair, say, could turn into a $30,000 credit to the buyers at closing, says Amorin.

Rule No. 2: Remodeling beats adding on

McMansions have gone the way of the SUV -- and large additions don't pay off either. "There's been a fundamental shift toward quality over quantity," says Warwick, R.I., real estate agent Ron Phipps.

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.

Want an eat-in kitchen? Knock down the wall between the kitchen and dining room ($2,000 to $8,000, depending on whether it's load-bearing or contains plumbing). That will instantly create a large eat-in kitchen and give the whole house a more open feel -- without a huge investment to make up at resale.

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

Some green improvements pay you back long before you sell your house. 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 (see dsireusa.org), and the work may pay for itself in just five years. Green features are also increasingly a selling point, says Phipps. "Most people in the market right now are first-time homebuyers in their thirties, and they've been raised to care about carbon footprints and being ecofriendly," he says.

The best way to go green is with a while-you're-at-it job: When it's time to replace your furnace, for example, upgrading to super-efficiency might add only $500 (after tax credits), compared with standard new equipment, but it will save you -- and your buyers someday -- $150 or more in annual heating costs.

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, according to Stephen Baker, president of industry analysis at NPD Group, a market research firm.

Still, that doesn't change the fundamental problem with expensive built-in technology: Put in a $10,000-plus dedicated home theater today, and something better will come along tomorrow and make your system look as if it's from the Mesozoic Era. 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: Let the Joneses be your guide

During the boom, you could be the first on your block to have a luxury kitchen, spa bathroom, or in-ground pool and count on others following suit. And even if the neighbors never took your lead, there was plenty of equity growth to cover your costs.

Nowadays that fudge factor is gone. "You really have to keep your house's amenities in line with the neighborhood now," says Kermit Baker, director of the remodeling futures program at Harvard University's Joint Center for Housing Studies.

If other houses on the block have real marble countertops, by all means add one to your house, but if everyone still has faux blue-marble Formica from the '70s, you're not getting your money back.

Also, keep your projects design-neutral so they'll appeal to the greatest number of people. Choose neutral colors and traditional electrical and plumbing fixtures unless your house has a modern architectural style.

Rule No. 6: 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, says Bernie Markstein, senior economist for the National Association of Home Builders.

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. 

Take a bite out of closing costs

Take a bite out of closing costs
Hold the fees please. How to save if you're buying a new home or just refinancing.
With mortgage rates still as low as they are, financing a house is dirt cheap these days, right?

Not if you pay a fortune in closing costs.

As anyone who has shopped around for a mortgage knows, it's extremely difficult to compare one lender's offering to with that of another lender because the up-front fees vary so much and are not guaranteed. Lenders and their venders can, and sometimes do, add or inflate fees in the eleventh hour of a transaction.

The U.S. Department of Housing and Urban Development (HUD) has been working on regulations that promise to simplify the mortgage process and save consumers as much as $1,000 off a typical mortgage transaction. When such rules will be rolled out, if ever, is still anyone's guess.

With no regulation in sight, borrowers should consider these strategies for keeping their closing costs in check.

Get friendly with your current lender

If you're looking into refinancing, the first call you should make is to your existing lender, who already has critical information about you and your house on file, said Keith Gumbinger, vice president for HSH Associates.

Since you have an existing relationship, a "streamlined" process might be possible. That can save you a lot of extra paperwork and money on everything from application fees to appraisal fees.

Fee-ed Up?

Here are just some of the costs of closing on a mortgage.


Fee Average cost*

Application $272

Appraisal $310

Credit report $28

Document preparation $206

Processing $288

Recording $86

Underwriting $236

*Based on a $100,000 loan. Not every lender surveyed charges all of these fees.

Although fees for title search and title insurance are not determined by the lender, you may also get a break there. If you recently refinanced or took out a loan, you can save as much as 50 percent on title insurance by asking for a reissue rate, which your lender can request on your behalf.
If you're a homeowner shopping for a new house, you should also try giving your existing lender first dibs on the new business. Assuming you've been a good client and your lender originates the kind of mortgage you're interested in, it's possible to get a better-than-market deal, according to Gumbinger.
Get nitpicky about fees...

There are more than a dozen kinds of fees that could show up on your final closing statement, including credit report fees, appraisal fees, document preparation fees, title fees, recording fees and underwriting fees.

All told, fees on a $200,000 mortgage could add up to anywhere from $1,000 to $3,000 – that's not including any "discount" points you pay up front to get the best interest rate. (A "point" is a fee that equals 1 percent of the loan amount.)

Lenders are required to give you a good-faith estimate of your closing costs within three days after you apply for a loan. Some will give you such an estimate even before you apply if you ask for one. Even if it is no guarantee, this written estimate will give you an idea of what kind of fees you can expect to pay, as well as an opportunity to negotiate for a better deal.

"If you're a good credit borrower you can challenge fees if they seem excessive," said Gumbinger, noting that lenders don't control many fees that show up on your statement.

Keep in mind that the good faith estimate doesn't include such out-of-pocket costs as state mortgage taxes, homeowners insurance and property taxes, which you may be expected to pay at the time of closing. In fact, your total tab at closing could be several times more than originally estimated, said Gumbinger.

.. but keep the big picture in view

Closing costs are certainly a consideration for both new loans and refinancing. But it's important to not lose sight of what should be your first priority – getting the lowest rate possible.

Indeed, the difference between paying, say, 6 percent and 5.5 percent on a new loan adds up to nearly $23,000 in total interest on a $200,000 30-year loan. If you have to pay a few hundred dollars in closing costs to get that rate, you can rest assured that it is a worthy investment.

It may even be worth it to pay a point or so up front in order to lock in the lowest rates. Let's say that you'll knock your rate down to 5 percent on that $200,000 loan by paying an extra point ($2,000) up front. Considering that you'll cut $62 off your monthly payment and about $22,000 from total interest by going from 6 percent to 5.5 percent, it makes sense as long as you plan to stay in the house long enough to recoup those up front costs.

In fact, if you're short on cash you might even consider rolling the closing costs into your loan, if that is an option. You'll want to consider how much more you'll pay each month as well as in interest over the life of a loan.

If you roll $2,000 in finance costs into a loan with a 5.5 percent rate, for example, you'll pay an extra $11 a month and about $2,000 extra in total interest. In this case you're still better off than if you had not refinanced at all.

How To Buy a Home at a $100,000 Discount

How To Buy a Home at a $100,000 Discount

To pare down their growing inventory of properties, Fannie Mae and Freddie Mac are scrambling to unload nearly 150,000 foreclosed homes. And that means 2004-esque deals — like requiring as little as 3% down, offering to pay a portion of the closing costs and arranging special financing and warranties for repairs and renovations.

It's another option for home owners who want to trade up — and an easier way into the market for first-time home buyers, says Dean Baker, co-director of the Center for Economic and Policy Research who studies the housing market.

The best bargain might be the home's price. A SmartMoney analysis revealed that buyers could save $100,000 by buying a Fannie or Freddie home instead of similar fair-market properties just a few blocks away.

And while many of Fannie and Freddie's homes are at the lower end of the market and in less-desirable areas, a SmartMoney.com search of Fannie Mae and Freddie Mac listings revealed that buyers could find properties in good neighborhoods — and for $100,000 less than comparable houses nearby. For example, a five-bedroom, three-bath with a backyard, deck and two-car garage in tony Alexandria, Va., was listed for $445,000, $100,000 less than the average listing price in the area, according to Trulia.com. Four blocks away, a similar non-foreclosed colonial is listed for $639,900.

Or how about a three-bedroom, two-bath in Bergen County's leafy River Edge, N.J for $359,900 -- $85,000 less than the average listing in the area. One avenue over, a non-foreclosed similar home is listed for $474,888.

The downside: Angry neighbors. These types of listings are devaluing nearby properties, says David Howell, realtor and executive vice president at McEnearney Associates, which sells homes in the metropolitan Washington D.C. area. That means in some areas where Freddie and Fannie homes are on the market, buyers could find a better deal on a nearby market-rate home that doesn't require repairs, he says.

Buying a Fannie or Freddie home can be more complex than pursuing an open-market real estate listing — or even a commercial bank foreclosed property. There's a smaller selection of appealing properties — there were just six higher-end homes listed on a recent day in Alexandria, for example — and those tend to sell the fastest. And there's little room to negotiate price.

"Our goal is to recover as much as we can to offset our loss and not to be low balling properties just to move them," says a Freddie Mac spokesman. "We absolutely have no motivation to be leading a downward spiral in home prices."

The three best features of Fannie and Freddie foreclosures that make digging for these deals worthwhile:

Small Down Payment

For its foreclosed properties, Fannie Mae will accept down payments as low as 3% on 30-year mortgages at the same interest rates banks are currently offering. And Fannie Mae doesn't require private mortgage insurance. Compared to a typical bank mortgage, which requires 10% down, plus PMI for buyers with less than 20%, that's a huge savings — an estimated $51,000 up front and upwards of $2,500 per year PMI on a $300,000 mortgage.

It's a tradeoff, though. For buyers with 20% down, mortgage payments on a 30-year mortgage loan at 5% would be $1,288 a month. With just 3% down, the buyer would need to borrow $291,000 and make a $1,562 monthly payment.

Help with Renovations

Fannie and Freddie have fixed big flaws like leaky roofs and damaged electrical work, and they often handle small projects like replacing appliances that are broken or missing, tearing up old carpet, or fixing other damage left by former owners or vandals.

Now, to entice buyers who want to update or upgrade, many of Fannie Mae's properties come with an optional mortgage that includes extra financing up to $30,000 for repairs and improvements. But with a little down payment and the extra amount tacked on, the buyer could end up owing more than the house is worth — especially if home prices continue to drop.

First Dibs

Buyers who plan to live in their Freddie Mac-purchased home will get to see properties for at least the first 15 days they're on the market — before the listing opens to would-be landlords. Many bank-owned foreclosure properties are snatched up by cash-stocked investors who can wait out the downturn to sell later at a profit.

And Fannie and Freddie homes can be seen inside and out — unlike some regular foreclosure listings. Consider bringing along a contractor when you view the home to help spot areas that need repairs and provide pricing. (Most contractors will do this for free.)

"It gives families who want to buy a home to live in the opportunity to look and bid without competition from cash-rich investors," says a Freddie Mac spokesman

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