Recession Impact on Mortgages: What Homeowners Need to Know

A recession can wreak havoc on the financial system. A sluggish economy and high unemployment both contribute to decreased lending and consumer spending, which in turn negatively affects rates, programs and mortgages for consumers. However, obtaining a mortgage during a recession might be a smart move.

Existing Mortgages

An existing mortgage may be affected by a recession. However, if a mortgage is a fixed-rate, fixed-term loan, it will be unaffected. Conventional loans, as these are often called, are strong loans as the rate, payment and term are locked in at closing. However, adjustable rate mortgages that are tied to indexes (like the LIBOR or Prime) will be at the whim of the fluctuating interest rates during a recession.

Home Equity Loans

HELOCs, or Home Equity Lines of Credit, are often tied to an index (LIBOR, Prime). During a recession, these rates will fluctuate rapidly and drastically. However, a recession usually means a slowdown in consumer spending and lending, so the rates will often decrease in a recession, which means an adjustable rate on a HELOC may be lower than when it was initially funded.

Negative Amortization Mortgages

These loans, whose payments often do not cover even the interest on a loan, often have principal balances that increase, not decrease. A recession usually means that the housing market has slowed down--which means that home prices usually fall. If a consumer has a negative amortization loan, the chances of become "upside-down" (owing more on the property than it is worth) is high.

New Mortgages

Obtaining a mortgage during a recession might be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop. Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road. A borrower should be market- and financially savvy when considering large real estate purchases in a recession.

Warning

Consumers should be aware of any and all lending threats in the marketplace. When researching companies, it's best to get recommendations from friends, family members and colleagues before beginning a loan process with a loan officer--especially in a down market. Similarly, it's in the customer's best interest to research a lender's history on the Better Business Bureau website.