What Happens To Your Mortgage During a Recession?
A recession is an inevitable period in the economy, often referred to as a pause in an otherwise expansionary period. Recessions do end, but that doesn’t mean they don’t cause damage along the way. They also affect real estate markets and interest rates.
A healthy economy includes low unemployment, increases in manufacturing, income security, and steady or climbing interest rates.
Recessions can come along suddenly, or they can be a gradual process. Regardless, recessions include several months of high unemployment. People might spend less because they’re uncertain, so business earnings go down. Manufacturing can decline because companies tighten spending, leading to job losses.
How Does a Recession Affect Mortgages and Interest Rates?
When consumers are spending less, there’s not as much of a money flow through the economy. During a recession, it’s common for the Federal Reserve to make adjustments to interest rates to minimize economic disruptions. That can help stabilize the markets, and consumer confidence can go up, encouraging more spending.
Lenders then use the adjusted interest rate to set their loan and mortgage rates.
The problem is that people are less likely to spend during a recession and would rather save, so loans aren’t in high demand.
Home prices during a recession will often decline.
What Happened During the Great Recession?
The Great Recession lasted from 2007 to 2009, and it was extremely impactful on mortgages and the housing market because of the housing crash that triggered it.
Home prices went down quickly throughout the U.S., and employment soared. Homeowners were finding themselves owing more on their mortgage than their home was worth. Many faced foreclosure.
That’s not always what happens during a recession, though. In most modern recessions, house price appreciation has stayed relatively steady, and year-over-year growth in home sales has only declined a bit.
Home prices and the sales of existing homes don’t inherently go down because there’s a recession.
What typically happens is that the housing market can benefit during a recession. Monetary policy is loosened to stimulate the economy, leading to lower mortgage rates. This increases homebuying power, and homes become more affordable if people are willing to spend.
You Could Refinance
If there were a recession and mortgage rates went down because of it, in theory, if you had an existing mortgage, you could use it as an opportunity to refinance. Of course, to refinance you have to be approved by a lender.
That can be more difficult during a recession both because of economic factors and things happening in your personal finances.
What About Buying During a Recession?
While it can seem scary, buying a home during a recession can be a good long-term financial decision if you’re in the position to do it.
You may face less competition among buyers, lower housing prices, and lower interest rates. Since there’s diminished consumer confidence during a recession, you’re not likely to face the bidding wars that homebuyers are dealing with.
Of course, you’d have to have a steady income and be confident that it would stay the same for the foreseeable future.
The type of mortgage that could be most directly affected by a recession is one that’s an adjustable-rate.
An adjustable-rate mortgage has a variable interest rate. The initial rate is below the market rate for a comparable loan with a fixed rate. Then, as time goes on, the rate goes up. If you have an adjustable-rate mortgage for long enough, the interest rate will go beyond the market rate for a fixed loan.
During the mid-2000s housing crash, borrowers with adjustable-rate mortgages couldn’t make their payments when they soared. Since then, there have been more government regulations, but it could still be an issue.
Some adjustable-rate mortgages are structured so the rate can more than double in just a few years.
If for some reason, you had an adjustable-rate mortgage and your rate quickly went up during a recession, and you were facing economic troubles or a job loss, you might not be able to make your payments.
Overall, if you’re currently a homeowner, a recession isn’t likely to directly impact your mortgage itself. It could theoretically affect your home’s value or income, however. A recession can, in some cases, create opportunities for refinancing or buying a home if you have a stable income.
Written by Ashley Sutphin for www.RealtyTimes.com Copyright © 2022 Realty Times All Rights Reserved.