Home remodeling is on the rise. And no wonder. Owners having trouble selling their homes in this sluggish real estate market want to give them as much buyer appeal as they can afford.

Others are deciding if they can't move, they might as well make the most of the house they may be calling home for some time to come.

After a year of decline in home remodeling, the number of homeowners saying they plan to remodel in the next 12 months increased from last year, according to RemodelOrMove.com, a website that provides homeowners remodeling options and has conducted semi-annual surveys of owners since 2005.

In tough economic times, it's important to make smart decisions. Here's what to consider before you pick up a hammer:

1 - The biggest bang for your buck

Before you even come up with a plan, consider how long you will live in the home. If you only plan to stay for several years, you may not be able to earn back the cost of a major renovation. Short-term owners should consider simple cosmetics, such as refinishing floors, painting and updating fixtures and lighting.

If you plan to stay in the home for five years or longer, then a kitchen or bathroom renovation provides the best return on your investment.

One of the biggest mistakes people make is to install a new pool in parts of the country where the weather is colder. In general, renovating should bring a property up to the value of the comparable houses nearby, not make it the most expensive home in the neighborhood.

A good rule of thumb is you shouldn't try to improve the value of your home more than 25% of its current value.

2 - Financing the project

Before you start renovating, estimate the cost and decide how you'll pay for it.

Borrowing is not the only way to finance a remodeling job. If your project is inexpensive and you have adequate savings, tapping them is the easiest way to go.

Many use their credit cards for projects under a few thousand dollars.

Owners can finance a kitchen or bath renovation or add a deck that way. If you hire a contractor for a bigger project, the costs can balloon. Then you may be better off with a personal loan, a home-equity loan or line of credit.

Sharp declines in home values mean many owners have no equity to tap. For those who do, financing home improvements with a home-equity loan makes sense because the interest is tax-deductible, Woolsey says.

3 - Are you covered?

Before you start a project, make sure the contractor and subcontractors have adequate insurance coverage. Ask if the contractor has workers' compensation, which covers lost wages and pays for medical and rehabilitation expenses if workers are injured. If not, an injured worker can sue you, says the Insurance Information Institute.

If you're adding an extra room, you'll need to increase your home insurance coverage. Don't wait until the renovation is completed to contact your insurance agent. If the addition is damaged or destroyed before insurance coverage has been increased, you may be responsible for the cost of repairing or rebuilding it.

Homeowners also should visit DisasterSafety.org, where the Institute for Business & Home Safety provides info about each state's building codes and standards. It's where homeowners can find out how to be sure contractors make their homes hurricane- or wildfire-resistant.

And during the renovation keep all of the receipts for items purchased, such as furniture and electronics, because you will want to make sure you have the right amount of coverage for personal possessions.

4 - Ways to save money

Kitchens and bathrooms are the most popular renovation projects. But don't overlook less-visible improvements that may cut the costs of owning a house.

Updating old plumbing and electrical wiring and disaster proofing your roof may lower your insurance premiums.

Owners of older homes can reduce their energy bills by adding insulation and installing new windows. Federal and state tax credits for certain improvements — such as energy-efficient central air conditioning, heating or water heaters — can lower your costs even more.

In the end, a renovation project's payoff may be measured best by how much satisfaction it gives the homeowners.

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Some homeowners underwater on their home loan — meaning they owe more on the mortgage than the home's current value — are turning to "strategic defaults" in which they simply walk away from mortgage debt.

But financial experts warn — the cost of skipping out on mortgage debt can be high.

The American Bankers Association recently warned homeowners about the consequences of strategic default, including the possibility of the bank obtaining a judgment to pursue the homeowner's assets, such as bank accounts, cars and investments.

A foreclosure — regardless of whether it is because of a strategic default or other circumstances — also hurts a consumer's credit score. Foreclosures remain on a credit report for seven years, with the impact gradually lessening over time.

For someone who has a foreclosure on a credit report, the FICO score can generally begin to recover after a couple of years, assuming the consumer stays current with the payments on all the other credit accounts. In addition, a voluntary foreclosure can impact a homeowner's ability to qualify for a new mortgage for years to come.

Tax liability is another danger of defaulting. Although the Mortgage Forgiveness Debt Relief Act of 2007 (extended through 2012) offers widespread protection from federal taxes following a foreclosure, state taxes still may be due on unpaid debt.

A lender also can pursue the remaining debt from an unpaid loan by obtaining a deficiency judgment against the delinquent borrower, or may work with a collection agency to recoup losses.

And, of course, ethical questions surround strategic defaults. A survey by Trulia.com and RealtyTrac found that 59 percent of homeowners would not consider defaulting no matter how much their mortgage was underwater, although another 41 percent of homeowners said they would consider a default.

We're curious to know what you think. Would you consider a strategic default, or do you think it's just plain unethical no matter what the circumstances? Give us your feedback and opinion by clicking the 'comment' link below. Your email address will never appear with your comments or feedback.

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