Refinancing in a Bad Economy

Refinancing in a bad economy is usually a little different than when the economy is running smoothly. The process, the benefits, and the likelihood of approval are altered. If you know what you are doing, there are some great deals possible during a bad economy. Here are a few things that will be different when you try to refinance in a bad economy.

Homeowners Attitudes

The first thing that you will notice is that many homeowners are more skeptical of everything. They might not trust the banks they are working with. They will examine every offer that is presented to them and analyze it until they feel comfortable that it is in their best interest. 

Banks Will Compete

When times are tough, banks compete for the few customers out there that are considering a refinance. Customers with a good credit score are sought out by many different lending institutions. You will notice that lenders will start to advertise much more than they normally do. Customers will be offered incentives like free vacations or gift cards for refinancing with that institution. Many of these strategies are not necessary during better economic times. 

Low Interest

Another common occurrence in a bad economy is that the interest rate is lowered. The federal reserve sets the interest rate that it uses to lend money to banks. The Fed Chief will usually lower the interest rate so that more consumers will get involved in the marketplace. During a recession, the interest that you pay for a refinance is sometimes much lower than what your current mortgage is. In this case, it is in your best interest to try to refinance. You could be saving substantially on your monthly payment. Before you decide to jump into the refinance market, make sure that it makes sense for you. For example, if the closing costs associated with the loan are more than the amount that you would save on the payments, it's not worth it.

Tougher Standards

During a recession, the banks will typically be more strict with who they approve. They want to make sure that applicants have enough verified income for the loans they are requesting. They no longer offer risky loan programs such as "stated income loans". The credit scores required to get a loan often also have to be better than normal. The banks will offer fewer loans overall, but they will make sure that the loans they do offer are profitable. This reduces their risk and allows them to continue doing business in a down marketplace