Is Mortgage Refinancing the Right Move in an Economic Downturn?
5 Min Read | Last updated: January 29, 2024
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Find out whether refinancing your mortgage is a good idea to provide the cash you need to tide you through an economic downturn.
At-A-Glance
- Mortgage refinancing can help you raise cash in uncertain times.
- Interest rates tend to drop during downturns as the government generally lowers rates to stimulate economic growth.
- But rates can rise and fall suddenly, and loan requirements may tighten, as lenders react to changing market risks.
Economic downturns have been known to change the rules of the game in personal finance – and that includes mortgage refinancing.
Your reasons for refinancing may seem straightforward. Let’s say you have a pressing financial need and are looking to take advantage of your home – most Americans’ biggest single asset1 – to raise cash. A “cash-out refinancing” is a pretty common way to do this, in normal times. So why not in hard times?
Mortgage refinancing can get tricky during an economic downturn, as happened during the 2008 financial crisis and in early 2020.2,3,4 Government mandates and market forces sometimes trigger sudden swerves in the way lenders usually work. Interest rates can change in unexpected directions. Borrowers can suddenly face new requirements. Real estate pricing may turn into a guessing game. At the same time, your own financial circumstances could become uncertain.
In short, there’s no simple answer as to whether mortgage refinancing is the right move in an economic downturn.
Mortgage Refinancing 101
Cash-out refinancing is a common type of mortgage refinancing.5 This works by replacing your existing mortgage with a new one, at an amount higher than what you still owe on your home, leaving you with extra cash to use for other purposes. Paying back that extra cash as part of a mortgage can be less costly than a personal loan, depending on interest rates and closing costs. Rate-and-term refinancing (no cash-out refinancing), on the other hand, is used to lower the cost of your current mortgage when interest rates are favorable, without taking any “cash out.”5,6 In either case, your home acts as collateral, which introduces at least some risk of losing the roof over your head if you don’t repay the loan.
Homeowners do cash-out refinancing for various reasons, like home renovation and debt consolidation – and, in hard times, to shore up their finances. Lenders will usually charge a bit more for cash-out refinancing than for rate-and-term refinancing.5,6
How an Economic Downturn Impacts Mortgage Refinancing
Economic downturns, though, have potential to disrupt “business as usual” in mortgage refinancing. That’s what happened during the 2008 financial crisis and again in early 2020, which is an instructive example.2,3,4
Millions of Americans lost jobs suddenly and simultaneously in 2020.7 The U.S. Federal Reserve took action to help keep mortgage loans flowing. The Fed bought bundles of loans known as mortgage-backed securities.8,9,10 But in some cases mortgages and mortgage refinancing became harder to obtain.2
Some lenders tapped the brakes, actually increasing interest rates or tightening requirements such as higher credit scores. Processing loans often took longer, including demands for more proof of borrowers’ ability to pay. Some lenders discontinued certain types of mortgages. Others stopped offering home equity lines of credit, which are often considered an alternative to cash-out refinancing.11
Because of these factors, and sudden increases and declines in interest rates, the number of Americans likely to both qualify for, and benefit from, mortgage refinancing began to seesaw. History shows that whether mortgage refinancing is the right move for you can change from day to day.
Refinancing Your Mortgage to Weather the Storm
When considering refinancing, personal finance advisors suggest extra diligence.12,13 Watching for market changes and shopping around becomes even more important when interest rates may swing from day to day and from lender to lender. You’ll need more patience when processing loans takes longer.
It’s worthwhile to check and recheck your own financial profile and other pertinent information against lenders’ changing requirements to qualify for a loan. The same goes for making a realistic assessment of your financial stability.
Homeowners with less robust financial profiles may have fewer options, as lenders tighten requirements when economies turn down. But those homeowners were potentially able to hold onto some of their cash a little longer thanks to government relief measures, such as the various 2020 forbearance programs.
The Takeaway
During an economic downturn, many people look to raise the money they need by refinancing their mortgages. The roof over your head provides domestic shelter, of course, and at the same time it can be a useful tool to help you weather financial headwinds. But it’s essential to strike the right balance when deploying such an important asset.
1 “The Wealth of Households: 2021,” U.S. Census Bureau
2 “Refinancing Inequality During the COVID-19 Pandemic,” Federal Deposit Insurance Corporation
3 “Small Mortgages Are Too Hard to Get,” The Pew Charitable Trusts
4 “Origins of the Crisis,” Federal Deposit Insurance Corporation
5 “Understanding your options for refinancing,” Freddie Mac
6 “What Is a Rate-and-Term Refinance?,” Experian
7 “14.6 million private sector jobs lost during second quarter 2020,” Bureau of Labor Statistics
8 “The Federal Reserve’s Response to COVID-19: Policy Issues,” Congressional Research Service
9 “Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy,” Federal Reserve
10 “Federal Reserve announces extensive new measures to support the economy,” Federal Reserve
11 “Wells Fargo to stop granting home equity lines amid uncertainty: sources,” Reuters
12 “What Happens if You Can’t Make Mortgage Payments During a Recession?,” Experian
13 “Should I refinance?,” Consumer Financial Protection Bureau
Karen Lynch is a journalist who has covered global business, technology, finance, and related public policy issues for more than 30 years.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
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