High Interest Rates Keep Homeowners From Renovating, Even as They Stay Put

Millions of American homeowners who refinanced into historically low mortgage rates during the pandemic are increasingly finding themselves stuck — both in homes they might otherwise have sold, and in houses badly in need of updating. With interest rates now much higher, selling means giving up a cheap mortgage, and borrowing against home equity to renovate carries a cost that discourages many families from moving forward.

Home equity lines of credit, commonly known as HELOCs, are typically tied to variable rates that track the broader interest-rate environment. As rates have climbed well above the levels seen in 2020 and 2021, carrying a HELOC balance has become considerably more expensive, making large remodeling projects — a new kitchen, an addition, a finished basement — harder to justify financially.

The "lock-in effect"

Housing economists have described this dynamic as a "lock-in effect": homeowners sitting on 3% or 4% mortgages are reluctant to sell and take out a new loan at a much higher rate, even if their current home no longer fits their needs. That reluctance has been cited as a factor tightening the supply of homes for sale in many markets, since fewer existing owners are listing their properties.

For households that might otherwise move, remodeling is often framed as the next-best option — expanding or updating a home rather than buying a new one. But the same high-rate environment that discourages a sale also raises the cost of financing a renovation, leaving many owners unwilling to sell and unable to comfortably afford to remodel.

The result is a growing number of homes that are neither sold nor updated, as owners wait for mortgage rates or renovation-financing costs to ease. Until borrowing costs come down meaningfully, both existing-home sales and big-ticket remodeling activity are likely to stay below historical norms.