Weather and time finally cooperated and I made it up on the roof to inspect the chimney. From in the basement I could tell there was a terracota liner, but not what condition it was in. From above, the terracota was definitely chipping away, and could have looked better. There was also, clearly visible, fiberglass insulation coming out of a crack. It had been stuffed into a crack, 6 feet down from the top, in one of the difficult to access areas. From what I saw, I think it's obvious that a chimney liner will need to go in. That'll be easy enough to do. Let's say I add the liner, cap, etc. The areas that need to be repointed have obviously been damaged by water intrusion from the room. If I protect the outer surface of the chimney which is inside the house from further degradation, should I expect the mortar to weaken further? If further weakening is not a concern, should I even bother repointing anything other than a major trouble spot (i.e., holes and cracks stuffed with fiberglass)..?

Wow, thanks for all the wonderful responses. Seems like reality is raining on my parade a bit. But there's lots of great information here. As akamainegrower suspects, the chimney is not one of those big chimneys--it's only about 3' by 3'. Technically there is a second chimney at the back of the house as well, but that begins where the kitchen is (and I think the kitchen has always been in the same spot) so perhaps that second one was for an old kitchen stove? I'm intrigued a bit by the gas appliance possibilities--although I love a wood fire, gas seems like it might be more possible. A wood stove would be a great option, but unfortunately our rooms are fairly small and I can't really picture any spot where a wood stove could fit if it were standing out from the wall. There's really only space for something that fits into an existing cavity. However, there may be space next to the existing chimney. I seem to recall that, years ago, I heard of some kind of fireplace system that could be installed with some kind of pipe chimney instead of a masonry chimney? Meaning it could more easily be retrofitted to run up the interior of a house? Perhaps I'm completely misremembering. DK and Sons, thanks for the top about the recommended annual inspection. I hadn't realized these were recommended even where the chimney is not used for a fireplace. I'll have to look into that, and check whether this company is reputable or what the work usually costs in my area.

I have to agree with ci_lantro. The niche doesnt look good. The whole fireplace is too tall and narrow. It would have looked better if it were wider. Since it isnt, and since it has that goofy niche thing, I would drywall the top part too. I also agree, the mantle is too high. I am not particularly fond of your white wash, but, I do think once it is drywalled at the top, that will look fine. I have paint washed my fireplace also, but, it is an enormous fireplace and I used gray wash. I am very happy with the wash, although will never be happy with the enormous size of it. :-)

Hey Dave! Long time no talk! It sounds like your corner bead was pulling away at a corner? That happens when the drywaller works too quickly and doesn’t properly mud the corner when putting it in, it also happens as homes settle over time because the wood behind the walls shrink or expand from changes in moisture and temperature and with even a mediocre tape job by the drywaller the cracks appear. A painter isn’t usually my first choice in repairing this since it’s not their specialty and they don’t have the tools to do it quickly and efficiently. There’s a few ways to fix it with the most extreme being remove the corner bead and add a new one. The easiest is like you said add some nails, mud and sand then texture as needed. Good luck!