This has been covered at great length - do a search here on "insulating basement". What's your climate, anyway?

Sounds like you better do something before you close it in again (like add a layer of XPS to the wall). You should kill all the mold/mildew on the bare walls and maybe seal with drylock, etc., too.

Thanks. I will do a search. We're in Northern Virginia, btw. No visible mold or mildew anywhere, just basement mustiness that is remedied by the dehumidifier.

Mustiness is mould. Most molds are not visible till the concentrations are intense.

Absolutely no vapor barrier!

It will only trap moisture behind the wall moving inward during the summer.

Your best bet is foam board (EPS, XPS) or spray foam on the inside concrete foundation and around the rim (the wood around the top of the ceiling that your basement joists are attached to) then the drywall. Avoid fibrous insulation. Run a dehumidfier to keep the relative humidity below 50%.

Here is a link that might be useful: Designs that work in mixed/humid zones

I am also in N. Virgina (Arlington) in a cape cod style house built in the late 40's. I finished our basement 2 years ago. It went from a dark mildly musty space to what's now a nice cozy dry one.

Among the work, I first had several foundation cracks filled with urethane ("crack team"). I also regraded to allow the 3 day rainstorm runoff that we get often enough (couple times every year!) to go elsewhere instead of pooling next to the foundation and finding it's way in. Also added a second downspout out front (if one spout gets blocked by oak leaves in the middle of a storm, the water still can flow without running over the gutters down to the wall).

As for insulation of the walls, first I went around the inside perimeter (rim joist area) and sealed every last air gap with caulk, etc. and then applied solid pieces of foam in each space, followed by spray insulation around the edges. Very much a pain, but the results were worth it. (another option would have been to get a contractor to apply spray foam up there entirely...along with the walls - (next time I might do that instead).

Then I used 3/4" XPS on the walls. I glued it with foam adhesive, but supposedly you're supposed to fasten it mechanically. Anyway, all XPS joints between panels were taped ("tuck tape"). Then I framed the walls and used unfaced insulation in the wall cavities for some extra R value.

As I said, the result has been nice and dry and cozy (or nice and cool and dry in the summer).

We had a brief problem this summer when a downspout elbow came loose, allowing water to deluge the nearby window well and enter the basement through the window frame. Still, it dried out fine (humidifier) and there is absolutely no sign of moisture odor down there. ( I imagine the water flowed down the back of the XPS, so the fiberglass insulation never got wet.)

BTW, we left the floor unfinished (only painted) and kept the floor drain to see how things would hold up. Happy with that decision, as well. After a couple more years experience under our belts we might feel confident to finish the floor, but it's fine without thus far.

It all sounds like a pain, but the results were well worth it. No mustiness whatsoever.

BTW, I recall that inspection services of Arlington County stamped our basement plans that a vapor barrier was required.

But, as you can see, the professional opinions have evolved to go without, finding that those barriers sometimes cause more harm than good by not allowing things to breathe and dry out if moisture does get in there.

Done exactly right!

Mechanical attachment of the foamboard ensures it will always be tightly adhered to the wall.

Thanks so much for the info. Our contractor suggested no vapor barrier but I wanted to be sure. We do plan to use the foamboard insulation, so I feel good about that. We added a heat vent and return when we replaced our HVAC system last month so I'm thinking it will finally be warm and toasty down there with some air circulation and heat. Do you think the new temperature difference (warm air vs. the cold walls) will create condensation where we've never had it before? That's my new fear.

And Worthy, hopefully this won't be too dumb of a question, but how exactly is the foamboard "mechanically attached"?

thanks!

"Do you think the new temperature difference (warm air vs. the cold walls) will create condensation where we've never had it before?"

Unlikely. With the foamboard installed against the wall, it's surface does not get a cold enough for moisture to condense on it.

It's "mechanically attached" with fasteners such as tapcon screws w/washer, or powder-charged fasteners (like Ramset).

(Then, if you REALLY want to be a perfectionist, after installed you could take 5 minutes and put a little dab of caulk on each head so there's no chance of condensation on them. That's really pushing it, but it illustrates the same principle as seeing rusty roof nails in an improperly vented (or improperly insulated) attic (since the nails become cold enough to allow condensation onto them from damp air leaking up from the house).

Homebound:
Interested in your comment about foamboard in the rim joists and foaming them in place. I was thinking to do that but was steered away from it by members of this board. My main concern is inspecting for termites. The advice is generally to have the ability to examine the box from time to time for termites and therefore to use bats, or just push the boards in place (but that would leave gaps defeating the purpose). Do you have any concerns about that? I suppose if you put wall board up, you cannot examine the rim joists anyay, but just wondering.

First, let me say that I just did a lot of research about the subject in order to finish our own basement, so I'm just sharing what I've learned, if you know what I mean. I'm a handyman, but not a building expert, though I've seen my share of moisture damage in old basement walls and performed repairs for others.

That's an interesting point about termites, but I would think you could still use a probe/ice pick to see what's going on behind the foam. (But if the walls are finished, what are you going to do anyway?) Or, if you did have access, it wouldn't be that big to cut out/pull out the solid foam.

As for batts, I had read that they were a bad idea since they could hold moisture and cause rotting. In fact, I read that some relatively new homes had rim joists that allegedly rotted out due to batts holding moisture in that area. I don't know if that's true, but anyway.

how exactly is the foamboard "mechanically attached"?

As homebound said. Also, some foam insulation is designed to be secured by
boards. (Scroll down to interior basement and crawlspace.)

termites In some jursidictions--the US South, I believe--foam is prohibited on the exterior foundation. The termites burrow in the foam and you can't see them. But I don't know of any prohibition on the interior.

I am also considering using Tiger Foam and spray the box. This seems a little more permanent than foaming bords in place. I think it might actually cost more, but still researching.

Unless you are building a wine cellar a vapor barrier is not needed. If you ae not able to put a vapor barrier on the hot side of the wall do not due it. You might end up trapping the water vapor where you dont want it, like insulation and drywall.

Here is a link that might be useful: Vapor Barrier for Wine Cellars