Do you feel like your home is bursting at the seams and you need to add on? Join the club. In 2004, homeowners spent nearly $138.1 billion on more than 50 million home improvement projects, according to the Joint Center for Housing Studies of Harvard University. That trend shows no signs of slowing.

But before you begin any major renovation, you should take the time to research the housing market in your area. You can consult with a real estate agent who will conduct a market valuation of your home. This market valuation will give you an idea of the current value of your home and the value of your home after you complete a major renovation.

With that information in hand, you can take a look at homes that already have the renovation you are considering and perhaps some extra features that you would like to have - maybe that master suite opens up to deck or patio or the family room has specialty moldings and a unique arched window to let in the light. Before you begin, be sure that it makes more sense to renovate than it does to buy a home that already has a new master suite (or kitchen, or family room, or extra bathroom, etc.) and any other amenities that you desire but that your current home lacks. See Remodel or Move: Does It Make More Sense to Stay or Go?

Financing Your Improvement

Once you decide to renovate, the next step is to decide how you are going to pay for it. The most straightforward method is to simply pay cash. See What's the Smartest Way to Pay for Your Home Improvements. If paying cash isn't possible - either because you haven't got that much saved, or the money is earmarked for other purposes - you will have to secure a loan. This part can be tricky because there are several options from which to choose, including:

• Cash-out refinancing. With a cash out, you refinance your existing mortgage balance and borrow more. Although mortgage interest rates have moved from their 40-year lows, they are still extremely attractive. Since 2000, homes nationwide appreciated an average of 32 percent, according to the U.S. Census Bureau. Because of this, most people who have been in their homes for at least that long have substantial home equity with which to fund home improvements. Refinancing, with cash out, can provide you with the funds you need for the renovation. In addition, it is all tax deductible.
  
  Caution: Homeowners applying for cash-out refinancing worth more than 70% of their home's value will probably be hit with significantly higher fees to account for the higher risk of default for the lender.
  
  
• Home equity loan. With a home-equity loan, you take on the equivalent of a second mortgage with your home as collateral. Home equity loans are becoming more popular, as interest rates on home equity lines have rapidly increased. Home equity loans have fixed interest rates often for 10 and 15-year terms. An advantage of a home equity loan is that you can select a shorter term and pay less in interest.
  
  
• Home equity line of credit. A home-equity line of credit works like a credit card. You borrow a certain amount for a period of time at an agreed-upon rate and then spend as much as you like, whenever you like. How and when you repay the debt depends on how much you've borrowed and the terms of your loan. Home equity lines of credit are variable loans often tied to the prime rate, as set by the Federal Reserve. Because of the rapid increase in the prime rate, home equity lines have become less attractive.
  
  
• "Future-value" loan. Also known as a "single-close" loan, a future-value loan combines a construction loan and a mortgage in one package. The twist? The homeowner's equity in the property is appraised at what it will be after the remodeling project is completed. Fannie Mae offers these kinds of loans through its Homestyle Renovation and Homestyle Remodeling mortgage programs.

Find out what your home is worth, calculate how much equity you can borrow against your home and locate a lender near you.

Hiring a Contractor

Unless you're a whiz at DIY, you will want to find a contractor. Ask relatives, friends, and neighbors for referrals to contractors they have used. Be sure to see the work they have done first hand and make sure you get additional referrals from at least three other contractors.

Before you make your selection, drop by unannounced to one of the job sites. Check to see how the site is kept. Are trucks parked on the lawn? Is the yard full of building materials and debris? Is loud music playing? Would you feel comfortable having the workers you see on this job in and around your home for a month or more?

The time you spend looking for the right contractor now will pay off in how satisfied you are during and after the remodeling process.

Ask your friends, relatives, and neighbors about their contractor.

• Did the contractor complete the job on time?
• Did the contractor finish the job on time and on budget?
• Did the contractor keep regular, reasonable hours?
• Was the contractor a professional they would hire again without hesitation?
  
  When you meet with a contractor, make sure you ask these questions.
  
  
• How long have you been in business?
• Does your company carry workers' compensation and liability insurance?
• How many projects like mine have you completed in the past year?
• What percentage of your business is repeat or referral business?
  
  

The last question is very important. Quality contractors work nearly exclusively through repeat and referral business. A contractor who puts up his sign in one neighborhood and completes quality work will often find that he can stay in the neighborhood for an extended period of time through referrals.

A major home improvement can take two months to complete - spending time planning the job for at least six months can help to ensure that money will be well spent, and the addition will meet your current and future needs.