San Diego Housing Bubble News and Analysis

This is a good question. I was thinking of getting a 10yr I/O variable rate mortage for the home I just purchased. I would have saved about $350 month for 10 years, which ended up being about 42k. I did put 20% down on this house, and bought the house at about 30% off peak(Bank owned, put in a lowball offer). I felt that by going interest only, after 10 years, I would be fine, and the house would appraise for about what I paid for it. I would still have the 20% of equity in the house that I initally put in there. So I would have not much problem refi'ing.

Well after much thought, I elected to lock in a 30 yr fixed at 6%. I made this decision based on the assumptions the rate may be up to 8% or higher, and who knows if this housing market will recover in 10 years.

I too just purchased a home about 30% below 2006 prices but we went with a 10 I/O/30 year fixed at 6.0. I put 20 percent down also. Thinking the same I should have maybe 20 percent increase in 10 years if the market goes the way I think will but doesn't matter because we plan to live here until the kids finished High school.

One thing to consider is that Shiller feels that the bottom will be around 2013 at the earliest (5 years from now). Unless we have massive inflation (That is an interesting 'if'), houses will have a dollar value in 2013 that is less than their mortgage. This makes refinancing a house around that period problematic because the property will be underwater. The historical period of house prices is 12 years peak to peak (or if you prefer, valley to valley). This makes 6 years down from peak (and about 6 years back up).

I would be careful about buying into any loan where you would have to refinance when the lock goes away because you can't afford the adjustment. You can easily get caught on the downside with these. The adjustment and what rate you can get in the future will depend upon what the Fed rates are in the future (which can be hard to predict). Not only that, if Fed rates go up, what the comps for the house you have the mortgage on may be lower than the outstanding balance of the loan (Interest rates and property prices move in opposite directions, interest rates up, price goes down.. and visa-versa).

Best way to look at this is with the following questions:
1) Can you presently afford the fully indexed rate (What you would have to pay if the adjustment went to the cap)
2) Will your wage increase enough during the lock that you will be able to handle the fully indexed rate.

If #1 is the situation, you don't have much problem either way. I would recommend trying to save and invest the difference between the fully indexed rate and the current rate you would be paying. For #2, I would try to save off as much as possible whenever possible. Built up a safety net.

Neither #1 nor #2 is flirting with disaster. I would do as the last sentence in the previous paragraph and save as much as possible. You may have to come up with cash on a refi, depending upon where rates are in the future.

ucodegen

Thanks and I agree with the 12 year peak to peak. I'm sure that will give us enough time to forget and redo...

I'm getting ready to re-fi my 5 year fixed and look at a 6% or even a 5.5% 30YF as a great selling point if it's an assumable loan. Who knows where we might be in 5 or ten years. Remember when we had over 10% interest rates?
As a survivor of the Nixon administration I look forward and cringe at the leadership choices I have. GW warn't so bad with the economy.
The 10 year I/O is also an option as I approach retirement and the stairs get to be a pain. But that means selling and moving although a single story would be nice on the bad and getting worse days!

Anybody know where I can do a buydown to 5% for a 30 YF?
My obsessive compulsive disorder is kicking in so don't ask why!

With a buydown, I can offer 30 YR fixed @ 5% PITI.
Loan amount max is $417K
IF you qualify,
Here are the buydown options at the moment.
RATE % cost
5.625 .25
5.50 .75
5.375 1.50
5.25 2.25
5.125 3.25
5.00 4.00
Subject to change at anytime. There are closing costs to get these rates.

Tugg I am one of those anal risk averse types so I always advocate the 30 year fixed mortgage even if it is a little bit higher. Savvy people who can make a better return on the money do indeed do better by not getting into these safer vehicles.

I also advocate buydowns however I am really careful as to how much I buydown. I always look at the expectancy of how long I intend to keep the property. Notice I use the words keep the property, not necessarly live in it. Performing the exercise of whether the buydown is worth it or not is pretty easy. A broad (very broad) approximation is about 4 years per point.

HLS can run the numbers for you to see when the accumulated interest for each rate crosses over the buydown amount. You may find that getting the 5.5 may be the better deal for you. The thing is that the simple crossover point calculation doesn't account for inflation.

SD Realtor

Inflation is a big wildcard in this. If we have high inflation and no growth then that is stagflation and forget about the housing market in that case because there will be more serious issues like keeping yourself employed! Dirt cheap housing prices mean nothing if cost of commodities are skyrocketing (already happening unfortunately), pay is declining and you lose your job!!