Should I Refinance My Home During a Recession?

Should I refinance during a recession? It's a legitimate question, and as with most good questions, the answer isn't simple. In the right circumstances with your personal finances, interest rates and the housing market in your area, the answer is, "Yes." But it's important to consider the following information as you try to decide - should I refinance?

The Purpose of Refinancing

The three most common reasons for refinancing are to lower your home mortgage interest rates; to avoid a rate increase in an Adjustable Rate Mortgage, or ARM; or to get cash out of the equity in your home.

Lowering Your Rates. If interest rates have dropped since you took out your home mortgage, it can make sense to refinance the loan by taking out another mortgage that pays off the first one, leaving you with a lower interest rate and lower monthly payments. Overall, this option gives you lower payments and reduces your monthly expenses.

Adjustable Rate Increase. In an Adjustable Rate Mortgage, you have a low initial interest rate that rises to a predetermined level at a given time, typically between a year and three years. If you can qualify for a rate lower than the ARM rate, refinancing can save you money. If fixed rates are significantly higher than the ARM rate, reconsider your benefits because your payment will increase.

Cash Out. The purpose of a cash out refinance is to take a mortgage that pays off your existing mortgage, while taking extra money for other purpose. The maximum amount is limited to your equity. You can then pay off the first mortgage and pocket the difference.

Recession and Refinancing

An economic recession can help or hinder each of the above scenarios. Typically, in a recession, housing values go down because the demand for houses has gone down. Since the economy slows, interest rates drop. This can make refinancing attractive.

You want to be certain that the cost of refinancing - that is all the costs associated with getting another loan - will be offset by the lower monthly payments you can get. But be careful, especially in a cash out refinancing situation because a bad economy, with your housing value down, you have less equity to take out. If values are still dropping, in any kind of refinancing, you could end up upside down in your home, that is owing more on it than it is currently worth.

Your Personal Finances

So, while general economic conditions in a recession typically generate lower interest rates, you still need to weigh the question - should I refinance - in the light of your personal financial circumstances. Has the recession impacted your career field or your job? Are you making less or likely to make less? Can you afford the closing costs of your new loan? If your income is less, can you meet the debt-to-income ratio of a refinanced loan.

Lenders in Recession

Because business is cyclical, typically a period of boom precedes a bad economy. In hot times, lenders relax restrictions as generally people have more money, are borrowing more and have lenders competing for them. In a bad economy, lenders typically draw back. Loans become more difficult to qualify for.

If you can get a loan in a recession, you should refinance. Be sure the new loan lowers your payments and your home values support the loan amount.