Should you pay off your mortgage before a recession?

As of early 2024, economists predict lower chances of a recession in the coming year than before, according to a Bankrate survey. Experts predicted a 65 percent chance of recession in the second quarter of 2022, but as of the fourth quarter of 2023, those chances have dipped to 45 percent. That doesn’t mean a recession is impossible, though.

If you are nervous about the potential of an economic downturn, you may be looking for ways to shore up your finances in advance of one. However, if you’re considering paying down your mortgage to prepare for a recession, think again.

Should you prepay your mortgage ahead of a recession?

Most homeowners would be wise to stay the course by continuing to pay down the mortgage monthly rather than in a lump sum, says Greg McBride, Bankrate’s chief financial analyst.

“In a recession, you want to preserve liquidity, not restrict it,” says McBride. “Paying down the mortgage restricts your liquidity.”

To seriously consider paying down a six-figure mortgage balance, you need a six-figure sum of cash — the “liquidity” McBride refers to. So the question becomes: Would you rather trade your cash cushion for no monthly mortgage payment and a paid-off house, or have a six-figure balance in the bank but continue to owe on your house?

For most homeowners, it makes more sense to hang onto the cash and keep paying down the mortgage in monthly installments.

Pros and cons of prepaying your mortgage before a recession

In some cases, it makes sense to keep making your regularly scheduled mortgage payments during a recession. However, prepaying could make sense in certain situations. Consider the pros and cons of prepaying your mortgage before you do it, which include:

Who should prepay their mortgage before a recession?

As with any rule of thumb, there are outliers — those folks in special circumstances who might consider paying off their home loan before hard times.

One such group is made up of homeowners who are approaching both retirement and the end of their mortgage terms. If you owe a modest amount — $20,000 or $25,000, for example — and simply want to get rid of your monthly payment, writing a check for the remaining balance might make sense.

For most homeowners, however, the threat of a recession shouldn’t affect how you approach your mortgage.

Good debt vs. bad debt

Owing money on a house can feel risky, but keep in mind where mortgages rank in the debt hierarchy.

Some debt is clearly harmful to your personal finances. Carrying a credit card balance is one obvious example of bad debt. In this case, you’re paying double-digit interest rates to finance meals, vacations and electronics years after charging them to the credit card. You should pay down that debt as quickly as possible, in good times or bad.

Mortgage debt, on the other hand, is one of the most attractive forms of consumer debt available. While interest rates today are higher than they were in 2020 and 2021, compared to other types of debt, the long-term nature of a mortgage can be an asset to your financial health.

What’s more, if you took out a loan or refinanced three or four years ago, you’re probably enjoying a rate around 3 percent. If that’s the case, there’s even less urgency to pay off the mortgage, says McBride. After all, you’ve locked in a historically low interest rate for decades to come.

For most consumers, the home loan should be the last thing you pay down, says McBride. Instead, retire any higher-rate debt you have, such as credit card balances and auto loans. Then, devote excess cash flow to building up your emergency savings and funding your tax-advantaged retirement accounts.

Think through your fears

While the word “recession” sounds scary, the term just means that the economy is shrinking. Even a small contraction in economic activity qualifies as a recession. Also worth remembering: Most recessions are mild, brief and forgettable. For instance, in the two decades after World War II, the booming U.S. economy experienced four recessions but still continued to grow at a breakneck pace overall.

The worst post-war downturn was the Great Recession of 2008, but there is little likelihood that a potential recession in 2024 would approach that financial crisis in severity.

Even if the economy crashes, what would you accomplish by paying off the mortgage? If you lose your job because of a downturn, you’re better off keeping the mortgage open and using your bank balance to not only make monthly payments but also to buy food and pay utility bills.

“Home equity is not going to pay the bills; money in the bank will,” says McBride. What’s more, if the worst-case scenario plays out and you lose your job, you no longer will be able to tap your home equity. Lenders require stable and steady income for a cash-out refinance or a home equity loan. Without an income, your home equity is locked away until you sell.

It can seem like a good idea to repay all your mortgage, but it’s usually not the wisest idea. If you want to get more personalized financial advice, consider consulting a financial advisor.

Bottom line on prepaying your mortgage

If you are worried about an impending recession and trying to decide whether or not you should pay off your mortgage, consider that access to liquid cash is a much safer route to protecting your finances should you lose your job or face other economic hardships during a recession.

If you are nearing retirement or only owe a small amount of money on your mortgage, and you have the cash reserves to both pay off your mortgage and still retain some savings, then it might make sense to pay a mortgage off. Otherwise, it usually makes sense to keep your mortgage and ride out a recession.