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.

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.

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.

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.

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.