For decades, homeowners with equity have used home equity lines of credit (HELOC) to finance their home improvement projects. These HELOC loans act like a checking account, drawing money against the equity in the home to use for a variety of larger purchases, including home remodel projects. Once tax deductible, these loans were also used to pay off high-interest credit cards, making these loans very popular with homeowners.
Unfortunately, the market crash of 2008 changed all this. During the drop in home prices and resulting lender collapse, many borrowers defaulted on their loans and HELOC loans were particularly vulnerable as they usually sat in the second position, after the primary home loan. Many HELOC lenders received very little, or nothing, on their loans. As the challenges of Covid have affected the housing market, many lenders fear a repeat of the 2008 meltdown.
Surprisingly, a counter-current is also causing the scarcity of HELOC loans. As housing values have soared over the past year, new home loans and refinances have also increased. These lower-risk loans are also much higher in value, making them the priority for processing. Many lenders have stopped offering HELOC loans entirely.
So, what can you do if you want to remodel your home? Many homeowners are using cash-out refinancing as an alternative. Borrowers with equity and good credit will always be attractive to lenders. While HELOCs do exist, in this climate it might make more sense to use the cash-out option which will offer a lower interest rate for the money and is easier to find.