How a Recession Impacts Your Mortgage
Recessions are a slowdown in economic activity and are usually accompanied by a decline in financial markets, including the housing market. They are marked by reduced consumer spending. People are often reluctant to buy goods and borrow money. So in order to stimulate the economy, the Federal Reserve will lower interest rates. This helps increase consumer confidence and encourage borrowing and investing. As a result, mortgage rates tend to fall during a recession. This doesn’t directly impact existing homeowners with fixed-rate mortgages. However, it’s good news for those with adjustable-rate mortgages or prospective homeowners looking to buy. On the other hand, it can also be a risky time to have a mortgage. The Great Recession of 2008 is a prime example. During that recession, many homeowners owed more on their mortgages than their homes were worth (this is known as negative equity or being “underwater”). With many businesses cutting workers and driving up unemployment, homeowners who could no longer keep up with mortgage payments were forced to foreclose because options such as refinancing or short sale weren’t possible. Though the Great Recession was the direct result of risky mortgage lending, any recession can present similar challenges for mortgage holders. Which is why it’s important to mitigate these risks if a recession seems likely.
How To Recession-Proof Your Mortgage
If you’re worried about how an impending recession could impact your mortgage, you can prepare for it by taking some steps to protect yourself. If you face difficulty paying your mortgage due to the effects of a recession, there is help available.
What To Do Before a Recession
If you have extra cash in hand, you may choose to spend it or invest it. But if a recession is looming, it’s a good idea to set aside some extra cash for the “just in case” scenarios, such as losing your job, according to Keith Spencer, CFP and owner of Spencer Financial Planning “One of the best ways to recession-proof your mortgage and house is to hold enough cash to be able to pay your mortgage for a period of time while you search for a new job,” Spencer said. Another helpful step to take in preparation of a recession is paying off any high-interest debt such as credit cards or personal loans, said George Jameson, CFP and financial advisor at Blackbridge Financial. This will help increase your cash flow, as well as limit the number of obligations you need to worry about if money gets tight. If possible, cutting back on non-essential expenses and increasing income through a side business or freelancing can be other alternatives that work for some people.
What To Do During a Recession
In the midst of a recession, if you experience financial hardship and struggle to pay your mortgage, it’s important to reach out to your mortgage holder and ask about your options as soon as possible. “Most mortgage [providers] are required to offer a loss mitigation option that homeowners can apply for to receive assistance during times of hardship,” said Kiersten Peshek, lead wealth advisor with Citrine Capital. Federal Mortgage Assistance For example, during the economic downturn in 2021 the federal government announced a loan modification program that changes the terms of the loan to help reduce mortgage payments on qualified USDA, VA and FHA loans. If you’re unable to pay your mortgage and it’s owned by Fannie Mae or Freddie Mac, you may be eligible to temporarily stop making payments. During this time, late fees won’t accrue and foreclosure proceedings will be suspended. Look up your loan with Fannie Mae or Freddie Mac to learn more. The Homeowner Assistance Fund (HAF) is another federal program designed to assist struggling homeowners in most states. Eligible homeowners can use the assistance to make up past-due mortgage payments, as well as housing related bills such as home insurance, property taxes and utilities. Keep in mind that there are income caps in place for the program. Refinancing Programs Government programs can also help you refinance your home to reduce the mortgage burden. For example, in 2021 the FHA announced a refinance program for low income families with loans from Freddie Mac or Fannie Mae. This plan could help borrowers who met certain criteria save between $100 and $250 a month on average.
What To Tell Yourself If Things Get Bad
Even if you take all the right steps to prepare for a recession, things can still go wrong. After all, you can’t control all the effects of a recession, such as your employer deciding to lay off a portion of its workforce. If you find yourself struggling to keep up with your mortgage during a recession, remember this: There is help available. Don’t hesitate to seek out programs that can help homeowners who need relief, whether through the federal government, state and local programs, or directly through your mortgage lender.
