Climbing temperatures may be turning the thoughts of many to remodeling and home improvement, but interest rates also are on the rise and could force some homeowners to think twice about initiating huge renovation projects.

Many homeowners have taken advantage of low interest rates and skyrocketing home values to finance everything from room additions to bathroom and kitchen makeovers during the last two to three years.

“If they [interest rates] continue to rise, they will definitely dampen the market,” said Roger Gallagher, a Belmont remodeling contractor who serves as the president of the eastern Massachusetts chapter of the National Association of the Remodeling Industry

But Gallagher and others in the industry say the gradual rise in rates over the last several weeks won’t abruptly put the brakes on an industry that has been riding smoothly for the last four to five years.

Recent studies have shown that only about a quarter of spending on home improvements nationwide is financed, with the vast majority of home renovations being paid for by savings or cash, according to Kermit Baker, director of the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies.

“Our thinking is [rising interest rates] won’t affect remodeling as much as they do homebuilding,” said Baker.

Nationwide, homeowners spent a record $138 billion on home improvements in 2003, according to a recent study by the Joint Center for Housing Studies. Spending has been largely fueled by upper-income households and baby boomers, but the number of Generation Xers owning homes has tripled to 12.4 million and their total improvement expenditures jumped more than five-fold to $28 billion, according to the Joint Center report titled “The Changing Structure of the Remodeling Industry.”

Baker predicts the remodeling market will stabilize at 5 percent or 6 percent growth in the short term, and argues that any rise in mortgage rates will be “balanced out” by the economic and job growth the nation’s been experiencing.

And Baker suggested that higher rates could actually benefit the market by spurring more homeowners who have locked in low mortgage interest rates to remain in their current homes, renovating and expanding them instead of selling and moving to larger, more expensive properties with a higher mortgage interest rate.

“To the extent that [homeowners are] happy with their current home and the neighborhood and school system, then it does provide a strong incentive to trade up [while staying] in place,” he said.

Remodeling contractors in Massachusetts say they are seeing signs that remodeling this spring season will be healthy.

“I expect it to be another good year. We’ve had a lot of activity, a lot of interest” from homeowners, said Gallagher.

Gallagher, president of Gallagher Remodeling Inc. in Belmont, said his company was even busy during the month of December when activity usually slows because of weather and the holidays.

‘Transition Period’

Others haven’t been as fortunate. Gallagher said he has heard from remodelers who had projects lined up that were either delayed or canceled altogether, as well as subcontractors who are dealing with lighter workloads.

Remodelers are jumping into the spring season after a harsh winter that led to a slowdown in business for many smaller companies.

Peter Feinmann, president of Feinmann Remodeling Inc. in Arlington, knows of at least four remodeling companies that had to lay off carpenters in late fall and winter.

“There was actually [an increase] this winter in our industry in terms of the number of [remodelers] who had to lay off people. And we found that we were able to pick up some new carpenters because of that. I’m not sure what caused the slowdown,” Feinmann said.

Remodelers acknowledge that the uptick in interest rates, coupled with inflation and the spiraling costs of supplies and products, are hard to ignore.

A big concern for those in the industry is the climbing costs of building products like lumber, said Timothy Callahan, president and chief executive officer of JTC & Co. in Wellsely. Over the last 18 months, the cost of plywood has risen more than 40 percent, he said. At the same time, insurance and workman’s compensations costs have tripled.

“It’s very challenging to manage our general administrative and overhead costs,” said Callahan, who is chairman of the Builders Association of Greater Boston Remodeler’s Council.

Charlie Allen, owner of Charlie Allen Restoration in Cambridge, said the weather was severe enough to have an impact on local business. Some of Allen’s colleagues told them they took jobs in the winter that were smaller and less profitable than they would normally take, which affected their overall bottom lines.

Allen said he believes that the election in the fall and the Iraqi war affected consumer confidence, and as a result, the remodeling industry. “I think there was a dip in consumer confidence,” he said

But he says demand is back up and many remodelers have booked projects more in line with what they’re accustomed to seeing.

Raymond J. Wiese, founder of The Wiese Co. in Natick, agrees that the weather stalled remodeling activity somewhat.

“Because the winter was so miserable there was a slightly later start to the [traditionally busy] spring season,” he said.

Wiese’s company, for example, was contacted last week to complete three projects that the company had bid on several months ago.

Wiese said his company, which is currently booked for projects between four and eight months in advance, has already reached 75 percent of its goal for the calendar year.

As interest rates climb, Wiese said he expects the industry to go through a “transition period.”

“We won’t see a disastrous transition,” he said.

“I’m still very optimistic about the long-term growth of this industry but I think like anything else you have to look at where the bumps come along,” Wiese said.

In Foxboro, remodeler Donald Baker said he’s been “outrageously busy” doing kitchen and bathroom renovations as well as family room additions.

“As bad as the weather was, I haven’t lost a day’s work,” Baker said. “There’s a lot of pent-up demand for work that has to be done because it was such a severe winter.”

In the remodeling business for about four decades, Baker believes that as long as interest rates remain below 7 percent, remodeling activity will remain steady.

The National Association of Home Builders reported that remodeling activity slowed in the fourth quarter of last year, the latest quarter for which information was available. The trade group attributed the slowdown to “unusually wet weather.”

But NAHB’s Remodeling Market Index showed that builders expressed confidence about future business expectations.

“Despite the slowdown in the fourth quarter of 2004, the market remains positive as future expectations continues to record growth,” NAHB Chief Economist David Seiders said in a prepared statement. “Calls for bids and appointments for proposals are still coming in, leading us to expect a healthy 2005.”

Aglaia Pikounis may be reached at apikounis@thewarrengroup.com.