How to Defeat Your Mortgage
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Recessions can bring economic uncertainty, which can affect your ability to make large monthly payments, such as a mortgage. You can “recession-proof” your mortgage by building up cash reserves to cover your housing payments for a few months. You may also want to consider paying off other high-interest debt, such as credit cards, so you can focus on mortgage payments if and when a cash crunch occurs.
Key Takeaways
- Unemployment tends to rise during recessions. If you lose your job, paying your mortgage can become difficult.
- Protect your mortgage from recession by creating an emergency fund of 30% of your annual income or two years of mortgage payments.
- Consider paying off high-interest debt to get more cash flow to pay your mortgage payments during a recession.
- If you fall behind on your mortgage payments, contact your lender. There are several programs that offer relief to struggling homeowners.
How the Recession Affects Your Mortgage
is a slowdown in economic activity and is usually accompanied by a downturn in financial markets, including the housing market. They are marked by a decrease in consumer spending. People are often reluctant to buy goods and borrow money. So, to stimulate the economy, the Federal Reserve will lower interest rates. This helps boost consumer confidence and encourages borrowing and investing.
As a result, mortgage rates fall during recessions. This does not directly affect existing homeowners. However, it's good news for potential homeowners who have or want to buy an adjustable-rate mortgage.
Hint
Although counterintuitive, recessions can be caused not only by lower prices, but also by lower home prices and less competition.
On the other hand, it can also be a risky time to own a mortgage. is a clear example. During this recession, many homeowners owed more on their mortgage than their home was worth (known as “underwater”). With many businesses laying off workers and increasing unemployment, homeowners who could no longer afford their mortgage payments were forced to foreclose because options such as refinancing were unavailable.
Although a direct result of the Great Recession, any recession can create similar problems for mortgage holders. Therefore, it is important to reduce these risks if a recession is likely.
How to Defeat Your Mortgage
If you're worried about how the coming recession will affect your mortgage, you can take some steps to protect yourself. If you're struggling to pay your mortgage due to the effects of the recession, help is available.
What to do before recession
If you have extra money on hand, you can choose to spend it or invest it. But if a recession is looming, it's a good idea to set aside extra cash for “just in case” scenarios like losing your job, according to Keith Spencer, CFP and owner of Spencer Financial Planning.
“One of the best ways to protect your mortgage and your home from recession is to save enough money to pay off your mortgage for a while while you look for a new job,” says Spencer.
Hint
Although not for everyone, a good rule of thumb is to set aside the greater of 30% of your gross annual income or two years of housing payments.
Another helpful step in recession preparation is credit cards or personal loans, said George Jameson, CFP and financial advisor at Blackbridge Financial. This will help increase your cash flow and also limit the number of liabilities you have to worry about when money gets tight.
If possible, cutting non-essential expenses and increasing income through a side business or freelancing may be other alternatives that work for some people.
What to do in a recession
In the midst of a recession, if you're struggling financially and struggling to pay your mortgage, it's important to contact your mortgage holder and ask about your options as soon as possible.
“Most mortgage (providers) require that they offer an option that homeowners can turn to for help when times are tough,” said Kiersten Peshek, wealth advisor at Citrine Capital.
Federal Mortgage Assistance
For example, in 2021, during an economic downturn, the federal government announced a program that changed loan terms to help reduce qualified mortgage payments and .
If you can't pay your mortgage and it's owned by Fannie Mae or Freddie Mac, you may have the right to temporarily stop payments. During this period, late fees will not be charged and the foreclosure process will be suspended. To learn more or search for your loan.
(HAF) is another federal program designed to help struggling homeowners in most states. Eligible homeowners can use the assistance to pay past-due mortgage payments, as well as housing-related bills such as home insurance, property taxes and utilities. Remember that there are income limits for the program.
Important
Some states, such as Alabama, have suspended applications after running out of available funds under the HAF. Some, like New York, ask homeowners to get on a waiting list. Check your state's status.
Refinancing programs
it can also help you refinance your home to reduce your mortgage burden. For example, in 2021, the FHA announced for low-income families with loans from Freddie Mac or Fannie Mae. This plan can help borrowers who meet certain criteria save an average of $100 to $250 per month.
What to tell yourself if things go wrong
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 when your employer decides to lay off some of its workforce.
If you're struggling to keep up with your mortgage during the recession, remember this: Help is available.
Don't hesitate to look for programs that can help homeowners in need through the federal government, state and local programs, or directly through your mortgage lender.
Frequently Asked Questions (FAQ)
Should you pay off your mortgage before the recession?
Generally, you don't have to pay off your mortgage before a recession. If you have extra funds to pay off your debt, it's more beneficial to focus on high-interest balances, such as credit cards and personal loans.
Is it better to have money or property in a recession?
Owning property during a recession is not a bad thing. However, those with more access to cash are better positioned to invest in ways that will pay off in the long run. Stocks and funds are popular investment options. It is less liquid than real estate and ties up some of your money.
Is the recession good for home buyers?
During a recession, potential home buyers may find lower mortgage rates and lower home prices. This means that as long as certain people have their finances in order and their jobs stable, a.
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