Money Management

An economic downturn could impact mortgage lending. Read on to see how. 

Will a recession hit in 2023? In April, the Federal Reserve warned that we might be in for one. And other financial experts have been sounding similar warnings for months.

The reality is that we don’t know if we’re in for a recession this year or not. While unemployment is currently low, a decline in consumer spending has the potential to fuel a recession and drive more people out of a job. Hopefully, if that happens, it will be a mild one. But either way, a recession could impact mortgage borrowers — for better and for worse.

How mortgage lenders might react to a recession

A recession could result in a decline in home buyer demand. Granted, that would be unlikely to happen right away, since there’s a massive lack of inventory in the housing market today. But if a prolonged recession strikes, in time, buyer demand could wane. And mortgage lenders might opt to lower their borrowing rates in an effort to drum up more business.

Right now, elevated mortgage rates are making it expensive to buy a home. So buyers might get some relief in that regard.

On the other hand, mortgage lenders might also opt to tighten their borrowing requirements in a recession. The reason? People’s financial situations tend to be more precarious during periods of economic instability. That could cause lenders to get stricter about who they give a mortgage to.

Lenders might, for example, insist on higher credit scores than usual, or impose higher interest rates on borrowers with credit scores that aren’t so great to compensate for the added risk they feel they’re taking on. So while a recession could benefit some home buyers, it might also result in some buyers struggling to get mortgage approval — or approval at a favorable rate.

We’ll have to just wait and see

At this point, it’s questionable as to whether we’ll experience a recession in 2023. But even if an economic downturn doesn’t strike this year, at some point, we’re apt to see economic conditions decline. That’s because recessions are actually a somewhat normal, recurring part of the broad economic cycle.

It’s important to understand how a recession might impact home buyers — both generally speaking and in the context of today’s market. It’s also worth noting that while a recession does have the potential to drive home values downward, that may not happen if a near-term decline comes to be. Again, that ties directly into real estate inventory, or the current glaring lack thereof.

If you’re looking to buy a home in the next year, it could really pay to do what you can to boost your credit score. Doing so might put you in a stronger position to borrow and snag a better rate on a mortgage.

You can raise your credit score by paying all bills on time and eliminating some credit card debt so your total balance is fairly low relative to your total credit limit. It’s also worth checking your credit report for errors that might need an immediate correction. Credit report mistakes can happen, so the simple act of being vigilant could help your score increase.

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Savings account interest rates can change over time. Although I could chase higher rates, read on to learn why I don’t bother. 

I have money in a high-yield savings account. In fact, I keep several different accounts because I want to keep emergency funds and savings for big purchases separate from my checking account.

High-yield savings account providers change their rates periodically, and also introduce new products. As a result, if I wanted to, I could move my money around when an account offering a better rate comes along. I do not choose to spend my time doing this, though. And there are a few simple reasons why.

It takes too much time with too little payoff

The biggest reason why I don’t spend time switching my savings accounts is because it is too much effort for the additional interest I could potentially earn.

See, I don’t keep a lot of money in savings — only the minimum I need for my emergency fund and for short-term purchases I am planning. At most, I might have around $20,000 in my savings in most circumstances unless something unusual is going on, like if I’m saving for a down payment.

While there are small differences in interest rates from one account to another, the differences just aren’t that substantial. And, the extra interest I could squeeze out with a change from one account to another would hardly add up to anything.

Say, for example, I had $20,000 in savings and I made a change from an account paying 4% interest to one paying 4.5% interest. Over the course of a whole year, I’d go from making about $800 in interest to making about $900. And, that’s assuming the accounts kept their rates the same for the whole year — which isn’t a given. If the account at 4% ended up raising its rate at any point in the year, then the difference wouldn’t even be that substantial.

To make that extra money, I would have to regularly monitor savings accounts to see which ones had raised their rates and were offering the best deal. I’d have to spend time opening a new account, moving my money over, and deciding what to do about the old account. And, I’d have to change the automated transfers I currently have going into savings.

That’s a lot of effort for a little bit of extra money that isn’t even guaranteed unless I repeatedly switched my account during the year whenever rates adjusted.

My savings account isn’t meant to be an investment

Ultimately, the reality is that my savings account isn’t meant to be an investment. I have money in there because I need it to be safe and accessible. Earning a little interest is a bonus, but it’s not worth devoting a bunch of time trying to get an extra 0.25% or 0.50% here and there.

I’m much better off leaving my saved funds where they are in an account paying a reasonable rate — even if it isn’t the absolute best rate — and focusing on things that will make a far bigger impact on my bottom line.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

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