real estate

Remodeling your home without home equity

  • One-third of homeowners have near negative equity in their homes.
  • Create a 'house savings account' and contribute to it regularly.
  • Sell stuff on the Web or hold a garage sale to clean house and make money.

Kelly Hess and her husband, David, spent $8,000 in April remodeling the outside of their Dallas house, and they paid for it without a home equity loan.

They tapped their "house savings account'' to replace the roof and install an 8-foot-high wooden fence in the backyard of the four-bedroom brick ranch house they bought in 2006.

The Hesses prove there are other ways to pay for home improvements besides borrowing against the equity in your property. Home equity loans and lines of credit have provided homeowners with a reliable, usually tax deductible, cash stream for many years. However, home equity has dried up during the nation's four-year housing slump.

Many people don't have the necessary equity in their properties to qualify for a home equity loan. In fact, almost one-third of the country's homeowners holding mortgages at the end of the third quarter have negative equity or near negative equity in their homes, according to a recent report from First American CoreLogic, a California company that tracks real estate data. In other words, these people owe more on the mortgage than their house or condominium is worth.

"Negative equity continues to be pervasive and to impact almost every segment of the housing market,'' says Mark Fleming, chief economist with First American CoreLogic.

While home values have tumbled nationwide, banks and other lenders have tightened the rules for borrowers to qualify to leverage their home equity. This means people should be thinking about alternative financing for home upgrades.

Paying cash is always the best option, financial experts say. However, they acknowledge that's understandably difficult for many who depleted their savings during the recession.

"My husband and I are both very much on the same page when it comes to money,'' says Kelly Hess, a legal secretary. "We don't like to use credit except for buying a car or a house.''

The following are alternatives to home equity loans that financial experts suggest homeowners consider to pay for home improvements, and some even help reduce the cost of remodeling.

Personal savings

Anybody can open a savings account at a bank or online for remodeling projects, but experts say making regular deposits is the key.



Rebecca Schreiber, a Certified Financial Planner and owner of Solid Ground Financial Planning in Silver Spring, Md., suggests putting your two "extra'' paychecks a year -- if you like many workers are paid 26 times a year -- into a separate account for home improvements. Those two paychecks are the third checks you get in two months of the year.

Since 2006, the Hesses have paid for $20,000 to $25,000 worth of interior and exterior remodeling on their Dallas home built in 1970 by tapping their house savings account. They put $1,000 a month into the account.

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