How the Economy Can Affect Your Mortgage Payments

Image Source: Unsplash
 

SPONSORED CONTENT

The economy’s health can affect the housing market in many ways. The number of homes sold, the value of homes, and the average price of rent can all fluctuate due to economic shifts.

But what are some ways the economy can affect your mortgage payments? A deeper look into the economy’s impact on mortgage payments will help you plan for long-term financial milestones and adjust your budget when needed. Let’s learn more.

Mortgage interest rates

Whether you’re applying for a mortgage, paying a mortgage, or trying to refinance, the economy plays a vital role in determining your monthly mortgage payments, primarily through mortgage interest rates.

Lenders raising mortgage interest rates or mortgage refinance rates can lead to a higher monthly payment for borrowers. However, these changes aren't arbitrary—they're often due to larger shifts in the economy.

How do mortgage interest rates work?

Here's how broader economic changes impact mortgage interest rates:

 

1. Changes in the global or national market affect the rate of inflation or unemployment.
2. The Federal Reserve sets the rate of short-term borrowing between banks, known as the federal funds rate, to regulate employment and inflation.
3. Banks adjust their interest rates for their own lending products, including mortgages.

This process may seem complicated, but you can remember that high interest rates are often set to limit market demand and encourage saving. Lower rates can make the home buying process accessible to more people, which can lead to higher demand in the market. 

Here, it’s important to understand that the price of a home can change based on interest rates. If you have a variable-rate mortgage or are interested in taking out a mortgage, higher interest rates can mean more expensive monthly payments. Lower interest rates can mean less expensive monthly payments.

Refinancing a mortgage

The same way interest rates can affect monthly mortgage payments, they can also affect monthly payments you make on a refinance. This can be important to keep track of if you’re looking to budget for the monthly payments you’ll take on with a refinance. 

Housing market trends

Raising and lowering interest rates can affect demand in the housing market. 

For instance, lower interest rates may cause higher demand. When demand is high and supply is low, housing prices can go up, making mortgages more expensive. This may cause the Federal Reserve to raise interest rates to inhibit borrowing. Higher interest rates can reduce demand and help the housing market cool down, which can lead to lower housing prices overall. Employment and income

The economy impacts more than just interest rates. It can affect household finances, income, and employment opportunities. 

The rise and fall of inflation can impact a borrower’s ability to make mortgage payments or constrict the household budget. It may also change how you budget for mortgage payments in the long run, as well as your larger-scale decisions such as selling your house or refinancing. If you know, for example, that interest rates are lowering, you may make plans to refinance your mortgage to obtain a lower monthly payment. 

Credit and mortgage payments

Since the economy also affects the price of borrowing and how we handle credit, it can play a role in your overall creditworthiness. This can affect your monthly mortgage payments directly and indirectly.

Whenever interest rates and income changes make it more difficult for you to handle your debts or regular expenses, you may find you’ll have to consolidate debt, apply for new loans, or pay off your outstanding debts more slowly. While paying less on your loans or your credit card’s outstanding balance may help your short-term budget, it can affect your credit negatively, which can, in turn, affect the monthly payments you’re offered on a mortgage or a refinance.

Additionally, lenders may change their creditworthiness standards depending on the health of the economy and whether they want to encourage borrowing. Pay attention to how these standards change if you’re interested in applying for a mortgage.

Government Policy

Changes in the economy may also have a direct effect on the US government’s regulation of mortgages and lending practices. This can affect monthly mortgage payments in different ways.

Loan forbearances

During certain exceptional economic circumstances, such as natural disasters or other large-scale crises, the US government may enact policies that allow the forbearance of your mortgage loan’s principal for a specified period. While forbearance doesn’t mean your mortgage is forgiven, this may mean you can delay making monthly payments on it for a certain window.

The specific conditions of this forbearance—as well as what kinds of mortgages qualify—will vary depending on the scenario. For example, in 2020, the US government passed the CARES Act, which allowed borrowers of federally backed mortgages, such as FHA or VA loans, to apply for a pause in monthly mortgage payments of up to 180 days^.

 

Government-backed mortgage programs

The US government also offers programs to make mortgages more affordable for homebuyers who meet certain criteria. Often, these criteria, such as income or creditworthiness thresholds, may be directly affected by larger shifts in the economy. FHA loans, for instance, are mortgages from private lenders that allow borrowers with lower credit scores to apply for a mortgage with a lower down payment.

Sometimes changes to the economy can even incentivize the US government to found programs that affect mortgages and lending practices. The FHA itself originated during the Great Depression as a way to insure mortgages and help homebuyers secure more favorable terms.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.