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What Happens To Mortgage Rates In A Recession? (READ THIS!)

Changes in our economy are already happening. Between supply chain issues, wars, labor shortages, covid, and so much more, there seems to be concern about what’s going to happen to with the economy, and therefore, with all of us that are impacted by it! Along with that, many are wondering what happens to mortgage rates in a recession. And what happens if you’re trying to get one? Here’s what you need to know.

Related: Making 1 Extra Mortgage Payment a Year. What is the Impact??

What happens to mortgage rates in a recession?

So what does history say? What happens to mortgage rates during a recession?

When a recession hits, economic activity then decreases. This is what happened during the 2008 economic downturn, and what has slowly been happening since 2020. Profits slow, unemployment rises, and spending slows or even stops almost completely. And in most cases, inflation rises too.

How are interest rates affected by a recession?

When inflation occurs, the government tries to counter it. In these cases, they tend to reduce interest rates (which then reduces mortgage rates). But, this also depends on the type of mortgage you get.

What Happens to Mortgage Rates in a RecessionDo mortgage interest rates go down during a recession?

So what happens to mortgage rates in a recession? They typically go down!

Will that happen this time around? It’s certainly possible!

Related: The Worst Time to Buy a House (…Is It Now??)

Fixed-Rate Mortgage

When you have a fixed-rate mortgage, the interest rate is set at the same percentage throughout the entire duration of your mortgage. In other words, getting a mortgage during a recession could save you thousands since you’d most likely get a lower rate.

If you got a fixed rate mortgage before a recession and want to lower your rate, you can try to refinance.

Adjustable-Rate Mortgage

With an adjustable-rate mortgage, the same applies but comes with another set of cons. While it will be easier and lower in interest during a recession, as soon as the recession stops, so does the low rate (most likely).

What happens when mortgage rates go up?

If you have an adjustable rate mortgage and your rates aren’t capped, you could spend thousands more than you would with a fixed-rate mortgage.

Related: How to Pay Off a Mortgage Early (I Did It In 11 Months!!)

What happens in a recession to house prices?

While mortgage rates are lower, what happens to house prices during a recession?

Pretty much the same thing!

During a recession, fewer people are looking for and buying houses. Because of this, houses are on the market longer. This motivates sellers to lower their listing prices so their home is easier to sell. So if you were looking for a better time to buy a home, a recession is almost always the best time.

Related: Preparing for a Housing Market Shift – Buy, Sell, or Hold?

Is buying a house during a recession a good idea?

So what are we saying? 

Are we telling you that buying a house in a recession is a good idea?

It can be!

Do home prices go down in a recession?

You need to make sure that you have the money and means to do so. Recessions can create massive layoffs and unemployment. And it could mean that other prices and costs go up. If you can manage that and can afford a mortgage and what comes with it, I say go for it.

Related: The Mortgage Process: Understanding the Home Loan Process

mortgage processWhat happens to inflation during a recession?

Usually, inflation decreases during recessions and increases during recovery. While the situation is slightly different this time around, it’s not entirely due to a looming recession. Part of it is recovering from a pandemic, as well as supply chain issues across the globe. However, this is expected to change soon and inflation will likely lower.

Is a recession coming?

It’s certainly possible. Many banks, experts, and lenders are noting that certain trends lead them to believe that a recession is inevitable. Luckily, recessions tend to be shorter periods of time, so even if one does happen, there are ways to combat it and still work towards financial goals, like getting a house.

Related: What to Do With Your Money in a Recession (The 2022 Recession is on!!)

How long do recessions last?

According to our history and the experts, recessions last 18 months or less. The average for each recession is around a year. Knowing this, most people have the best chance to get a cheaper mortgage soon, and be able to buy a home with a lower interest rate.

What shouldn’t you do during a recession?

It sounds like recessions can be a great time to buy big-ticket items, so long as you have the means to do it, but what shouldn’t you do during a recession?

While this will depend on your personal finance journey, there are a few things that you should try to avoid during a recession.

First, avoid any new debt, even if it’s not your debt.

Co-signing for new loans, or being added as a user to a credit card or account isn’t a great option during a recession. This is because you (or the person you sign with) could lose their job, lose their savings, or any other issue that could cause the loan to default.

This could easily lower your credit for years, even after a recession ends.

Related: Pay Off The Mortgage Fast (Like Us) With This Totally FREE Tool!!

Second, try not to take super risky investments.

This is not to say you can’t invest. But, keep it simple and don’t spend money you may need later. In other words, don’t choose a recession as the perfect time to invest in that $50,000 business venture that you’ll have to put a lot of time and work into.

Yes, millionaires may be made during recessions, but for every millionaire is someone who made the mistake of spending money instead of saving it for a rainy day.

Related: Buying a House? What Type of Mortgage Loans Are Best?

What happens if you can’t make mortgage payments during a recession?

Now, what happens if you can’t make mortgage payments during a recession?

Before selling your home or going into foreclosure, try these tips.

What Happens to Mortgage Rates During a RecessionRefinance Your Mortgage If You Can

If you have decent credit, or if your credit score has gotten better since you purchased your home, you could always try to refinance.

As we talked about above, rates are usually lower during times of recessions. And if the rate is lower than your current one, you could save thousands over the course of a year by refinancing. This means lowering your monthly payments!

Keep in mind that when you apply for a mortgage refinance loan, you’ll need similar documents to when you first purchased your home.

These include:

  • Your credit score and history
  • Current debts that you have
  • Payment history on your current loan
  • Your employment history and income

Be sure to keep documents of all of these, and try to make sure all checks out before following the refinancing process.

Related: Interest Rates Are Going Up, Should You Refinance Your Mortgage?

Have A Budget

In a recession, it can be hard to know what to budget for, when, and why. Things happen and fast.

One minute you may have a job, and the next you don’t. Maybe you’re also picking up side hustles to make more. Whatever the case, it’s important to have a bare-bones budget.

What is a bare bones budget exactly?

Basically, a bare-bones budget is exactly how it states — a budget that ONLY focuses on necessities.

This includes your four walls, including your…

  • housing,
  • transportation,
  • utilities,
  • and food.

Anything else is considered a luxury, so you can do without it (if need be).

Considering the necessities, what is your bare-bones budget? This will help you spend less and keep things afloat while you’re figuring everything else out.

Related: How You Can Prepare For The Next Recession (Even On A Low Income)

creating a spending planAdjust Your Spending Habits

Along with creating a budget, you’ll need to focus on sticking to it. Once you’ve created your bare-bones budget, adjust your spending habits accordingly.

If you’re consistently blowing your money, especially during a recession, it can limit and even reduce your savings. By being slightly stricter with your spending, you may be able to keep up with payments to your mortgage, even if you’re having a more difficult time.

Related: How a No-Spend Challenge Can Work For You

Focus on Your Emergency Fund

If you don’t already have an emergency fund in place, now is the time. It can help add certainty during a recession, when your job, income, and spending may be in jeopardy. This includes being able to pay your mortgage for a while, even if you’re not making a traditional or fixed income.

Of course, starting an emergency fund before a recession is advisable. But if you don’t have one, it’s okay to start now (if you can afford it).

When it comes to building an emergency fund, look at your budget and spending.

What do you need to cover these expenses? An emergency fund should be enough to cover 3-6 months’ worth of expenses. But I highly suggest building it up to a year’s worth of expenses if you can.

Also, save extra cash as much and as often as you can.

  • Can you sell some items from your home that you don’t need or use?
  • Can you side hustle?
  • Is it possible to automate your savings each paycheck?

Whatever you can do to build up your emergency fund faster, the better.

Related: How to Build an Emergency Fund From Scratch

What Happens To Mortgage Rates In A Recession?: Now Is The Time To Buy!

As you can see, buying a house during a recession can actually be a good idea. But, it’s important to remember that you’ll still want to keep up with your budget and have some money in savings. It’s possible to get a home for a decent price (and interest rate) and still meet your personal finance goals!

What do you think? Based on what happens to mortgage rates in a recession, would you buy a house??

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AUTHOR Kimberly Studdard

Kim Studdard is a project manager for online entrepreneurs and small businesses. When she isn't spending time with her daughter and husband, or reading her growing pile of horror books, you'll find her working on her HR degree and working towards FIRE.

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