Interest Rates on Home Loans in the Current Economic Climate

Interest rates on home loans rely as much on the global credit market as they do on your personal credit history. Many borrowers make the mistake of thinking they are immune to the greater market cycles when they apply for mortgage loans. High risk borrowers with low credit scores are more affected than low risk borrowers, but all loans will be subject to market factors. These factors drive the interest rate up and down, leading to a large fluctuation in loan limits and rates.

National Prime Interest Rate

The national prime interest rate goes down in a recession. This is the rate that banks and lenders are assessed when they borrow money. The Federal Reserve lowers the prime interest rate to curb inflation and encourage borrowing. Typically, a lower national interest rate will lower the rates on mortgage loans. 

Lower National Limits

Jumbo loans are less available in a recession. A jumbo loan is a loan that exceeds the yearly standards set for Fannie Mae and Freddie Mac Loans. These lenders, managed by the federal government, cannot issue mortgages higher than a certain amount. Private lenders can, however, and often they will do so in a booming market. When the market is recessed, the jumbo loan limit will drop. Mortgages become smaller across the board, and down payments will need to be higher in order to purchase a relatively expensive home. 

Attitude toward Risk

Perhaps the biggest factor affecting mortgage loans in a recession is the national attitude toward risk. In an economic boom, many lenders will favor risky investments due to the high potential payoff. When these risks do not pay off in a recession, the lender begins to feel a negative attitude toward risky loans. If you are a high risk borrower, you will find it is hard to get a mortgage loan in a recession. If you secure a loan, you will likely find you have a high down payment minimum and a high interest rate.

Liquidity in the Housing Market

Real estate prices tend to drop in a recession. Even though homes are cheaper, less people purchase homes because loans are not available, people lose jobs and people stop spending.  While you may be able to find a home at a discount price, you may not have the option of selling your home in this depressed market. If you owe a lot of money on your mortgage, the home may not be worth the amount you still owe. You will end up with a lower down payment, which means your interest rate will be higher on your next mortgage.

Government Programs

Government programs made to stimulate home purchases can often drop interest rates despite market factors. Following the recession of 2007-2009, the federal government offered many incentives to purchase a new home. First-time home buyers were promised an $8,000 tax credit on their purchase. Further, the FHA started guaranteeing loans at a low interest rate and with low to no down payment for qualified purchasers. Guaranteed loans will always be available at a lower interest rate because they pose less risk to the lender.