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What Happens To Interest Rates During a Recession?


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If you’re like most homeowners, you’re probably keeping a close eye on interest rates. This is especially true if you had hoped to refinance your mortgage or any other type of loan you currently have. After all, they’ve gone up over 1.75% in just a few months this year.

With the economy in recession, you may be wondering what happens to interest rates during a recession. Will they stay low, or will they go up? 

In this quick guide, we’ll take a closer look at what happens to interest rates during a recession and how it can affect your plans to buy or sell a home. Keep reading to learn more about what to expect with interest rates and whether or not now’s the time to refinance or sell your home.

What is a Recession?

A recession is a general downturn in any economy. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decrease in housing prices. 

Does this last that long? It depends, honestly. The Great Recession of 2008 lasted for 18 months. However, a recession can last for months or even years, and it usually takes a significant toll on businesses, consumers, and investors. 

It can be difficult to identify a recession until it’s already underway, but there are some telltale signs to watch for, such as a rise in jobless claims and a decrease in consumer spending. 

In the United States, a recession is generally considered to occur when there are two consecutive quarters of negative economic growth as measured by gross domestic product (GDP). 

By this definition, economists have declared that the US entered a recession in the summer of 2022. Low GDP, poor stock market performance, and sky-high interest rates are mostly to blame for this as the labor market, in this case, is still quite strong.

When it comes down to it, a recession can have far-reaching effects on an economy, including reducing output and employment, lowering investment levels, and increasing bankruptcies and hoarding of cash.

What Causes a Recession?

Economies don’t just dip into a recession for no good reason. A recession can be caused by various factors, including an increase in the supply of goods and services, a decrease in demand for goods and services, or a combination of both. 

When the supply of goods and services exceeds the demand, prices fall and businesses begin to lay off workers. As more workers are laid off, consumer spending decreases, leading to even further decreases in production and employment. 

A recession can also be caused by a decrease in demand for goods and services. This can be due to several factors, including a decrease in consumer confidence, an increase in interest rates, or a decrease in government spending. 

While recessions are caused by a variety of factors, and the two mentioned above are quite common, the most common cause is a slowdown in the money supply. This can be caused by tight monetary policy, which is when the money supply is decreased to control inflation. 

Other causes of recessions include:

  • Increases in interest rates
  • Natural disasters
  • Financial crises
  • Market bubbles
  • Pandemics

While recessions can be painful for businesses and consumers, it’s important to remember that they’re a natural part of the business cycle and usually only last for a few months.

What Happens to Interest Rates During a Recession?

Employment rates and consumer spending aside, do interest rates go down in a recession? Do interest rates rise in a recession?

During a recession, the Federal Reserve typically lowers interest rates in an attempt to stimulate economic activity. This is done in hopes that lower interest rates will encourage businesses to invest and expand, and also encourage consumers to spend. 

However, there is no guarantee that this will happen. In some cases, lower interest rates can lead to even less spending, as people may choose to save their money instead.

Furthermore, those interest rate drops are more common at the very beginning of a recession. As an economy begins to come out of the recession, the Fed tends to start to increase interest rates as a way to prevent the economy from overheating as people spend more.

What to Know About The Fed & Interest Rates

If you’ve been keeping up with recent news then you’ll know that the typical strategy mentioned above hasn’t been the case recently. To keep inflation in check, the Fed has increased rates three times in 2022. 

Though this may seem like a counterintuitive move in a time of high unemployment, Fed officials believe that it is necessary to ensure long-term economic stability. 

With rates at near zero, there is a risk that inflation could spiral out of control if the economy heats up too quickly. By gradually raising rates now, the Fed hopes to avoid having to take more drastic measures down the road. 

While higher interest rates may put a damper on economic growth in the short term, they are ultimately intended to help keep the economy on a sustainable path in the long run.

Should You Refinance During a Recession?

With all this mention of interest rates, what does it mean when it comes time to refinance a loan? Here’s what to know about refinancing different types of loans during a recession.

Refinancing a Mortgage During a Recession

Refinancing a mortgage can be a smart move for some homeowners in a recession. 

A refinance involves taking out a new loan to pay off an existing mortgage. This can provide several benefits, including the ability to get a lower interest rate, lock in a lower monthly payment, or access equity. 

However, there are also risks associated with refinancing, so it’s important to weigh the pros and cons carefully before making a decision. 

For example, refinancing can extend the length of a loan and increase the total amount of interest paid over time. In addition, closing costs can add up quickly. 

As a result, it’s important to work with a qualified mortgage lender to ensure that refinancing makes sense for your situation.

Should you refinance your mortgage loan with the way mortgage interest rates are right now? We wouldn’t suggest doing so. It’s best to refinance a mortgage when you can get better interest rates. With rates up over 6% currently, it’s best to wait.

Refinancing an Auto Loan During a Recession

Currently, the average auto loan interest rate is just over 4.3% for new cars and just over 8.6% for used cars. However, the interest rate you get ultimately depends on your credit score. Keep this in mind when considering whether or not refinancing an auto loan is right for you now.

With interest rates higher than usual, this could potentially make refinancing more expensive. Additionally, your ability to qualify for a refinance may be limited if you have lost your job or experienced other financial hardships as a result of the recession.

On the other hand, if you can secure a lower interest rate through refinancing, it could save you money in the long run. And even if rates are high, it may still be worth considering if you are struggling to make your current payments. 

How to Navigate Changing Interest Rates During a Recession

It can be difficult to navigate changing interest rates as we enter yet another recession. It’s unclear how long this will last or how long we can expect the cost of living to continue to increase.

In the meantime, here are a few tips for how you can navigate these changes to your personal finance as you consider how this might affect you as a homeowner and as a consumer.

Consolidate Other Debt

Many people choose to consolidate their debt during a recession. There are a few reasons why this may be a good idea. 

First, consolidating debt can help to lower your monthly payments. This can be helpful if you are struggling to make ends meet. 

Additionally, consolidating debt can help you pay off your debt more quickly. This can be beneficial if you are worried about your debt levels getting out of control. 

If you’re considering consolidating your debt, it is important to compare offers from multiple lenders to ensure that you get the best deal possible. After all, if you don’t end up with better loan terms than what you started with then it’s likely not worth your time and hassle.

Stay On Top of Your Credit Score

During a recession, it’s more important than ever to stay on top of your credit score. A good credit score can help you get approved for loans and credit cards, which can be essential for weathering a financial downturn. 

Additionally, a high credit score can lead to lower interest rates, which can save you money over the long term. Finally, a good credit score can give you peace of mind during a stressful economic period. 

Knowing that you have strong credit can provide some stability during an uncertain time. For all these reasons, it’s important to stay vigilant about your credit score during a recession. This is especially true if you’re considering selling your home as part of purchasing another home.

The Housing Market During a Recession

While all of this talk of interest rates during a recession is great as part of understanding how it affects your personal finance, what does it mean for the housing market? During a recession, the housing market typically cools off and prices decrease. This is due to decreased demand.

After all, when a recession hurts consumers’ buying power and leaves them with little extra cash, it’s difficult for them to find the money they need to buy a home. With less competition, homeowners then tend to have to lower prices to stay competitive.

Overall, demand has decreased, leading to falling prices and increased inventories of unsold homes. The decrease in demand has been especially pronounced for luxury homes and investment properties.

In addition, foreclosures have increased as borrowers struggle to make their mortgage payments. As a result, the current recession has had a significant impact on the housing market.

Should You Sell Your Home During a Recession?

Ultimately, the decision of whether or not to sell your home during a recession is a personal one. 

If you’re comfortable with the risks involved and believe that you can find a buyer at a price that meets your needs, then selling during a recession may be the right choice for you. 

However, if you’re considering selling your home during a recession, there are a few things you can do to maximize your chances of success. 

First, make sure your home is in good condition and priced competitively. Potential buyers will be looking for homes that offer the best value for their money, so if your home needs repairs or is overpriced, it’s likely to sit on the market for longer. 

Additionally, try to be as flexible as possible when it comes to negotiating prices and terms. In today’s market, buyers are looking for any advantage they can get, so if you’re inflexible, you’re likely to miss out on a sale.

Finally, if you’re not interested in the hassle of putting your home on the market, it’s possible to receive a quick, simple cash offer for your home. During a recession, this cash offer can help ensure your home isn’t sitting on the market for months on end.

Calculate the Value of Your Home Now

If you’ve been following along then you’ll know what happens to interest rates during a recession. They tend to go up as the recession peaks, which creates a difficult market for homeowners looking to sell their homes.

As an alternative to the traditional home selling process, you can get an immediate cash offer on your home. This helps you avoid the headaches of putting your home on the market and helps make the entire process much smoother and stress-free.

Want to see what your home is worth? Calculate the value of your home now with our free home valuation tool.

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