I believe the right, and the safe thing is to replace the knob and tube wiring. When we moved into this 1910 house 20 years ago, we wanted to save money and so just had an electrician add new wiring. Every time an old light was left on I worried about it. Finally last spring we had to do some replumbing and decided to replace the old wiring.

The electricians told us every day "You won't believe what we found!" and said that it was a miracle the house hadn't burned down.

Refinance, borrow the money, but get it done and be safe.

Yep, I agree. Wiring isn't a little thing. K & T scares the bejeezus out of me and it would be specifically BECAUSE you're spending big money on the attic conversion that it should be done now.

It'll never be any cheaper to do that job then right now...

The very first thing my husband did when he set out to remodel our old house was to have it rewired completely. I do wiring and electrical work myself and was installing a ceiling fan and light in my dining room some years back and ran into the old, old cloth covered wires in the ceiling joists of that room. I was getting ready to go kick off the circuit breaker and was absolutely and positively assured by the dH that the old wiring would be dead. So, there I am in my bare feet, on a metal ladder and cut through the wire with my crimps. I picked myself up from the tile floor seconds later after it blew me on my butt.

I've since found one other intact old circuit the contractor never bothered to detach. Scares the bejeebers out of me.

Call around to some electricians to get quotes. Depending on your house size and the accessibilities to the wiring in the walls, I suspect it can be done well and safely for less than 10K. Basic wiring isn't rocket science, but I would always want it to be inspected by a master electrician before it's covered over or used.

I also think this is more important than a master bath suite. You could lose the whole ball of wax with old wiring. Use opportunities like construction to update it, even if it's piece meal one torn up floor or wall at a time.

i wonder if the local inspector will force you to remove it before you can cover the area with flooring?

Yes change wiring.What will happen youll get your remodeling done and youll end up tearing out and wiring.Thats how it works.NOT only that but Id be afraid for fire.

Cutting out the old knob and tube is a huge pain in the rear. It was one of my very least favorite things to do in old houses.

Believe me I am one of the most skeptical people in the world when it comes to hearing "you should" do anything.
From what I could see of my wiring it looked OK but when I finally got around to reinsulating the attic I found some real horrors-- lots splices held together with flimsy electrical tape coming apart, that sort of thing. You just don't know what's in there until you open it up, and then the act of doing that can jar things loose that might've otherwise been ok.

10,000 is a lot. Get more quotes and ask them to break up the job for you, to address only the part which is the attic and the floor underneath the attic. It could be you can't afford to do this remodel, at least in the way you thought-- -where else can you save money?

When you're calling around talking to electricians ask what their experience is with oldhouses - you should be able to get a sense of whether they like old houses and how familiar they are with the quirks of old houses and tricks of the trade.

The rule of thumb is that leaving it alone is generally OK (unless there are some really flagrant problems) but the minute you start messing around with it & opening things up you really DO need to address the situation. Sorry to be blunt but if I bought a house with an "improved" attic and then found they left the old wiring in Id be really p***ed because at that point, to fix it you'd have to undo everything at a far greater cost.