First of all, I do think it is likely that interest rates will be higher in 3 years than they are now. There is a lot of pressure building up for inflation. As soon as the economy comes back to life -- even partly -- I think that inflation will increase, which will raise interest rates. And the overall interest rate is not dependent on housing prices coming back. To a lender, money is money. You could have a continued bad market for housing PLUS high interest rates. That's what happened in the 1970's, and there is no reason that it couldn't happen again.
However, the key for someone in your situation is to look at the limits on rate increases for your adjustable mortgage. If you have a good limit, such as no more than 1.5 percent per adjustment, you can have a revised rate for years 4-6 of no worse than 4.75 percent. If the limit is 2 percent, then your maximum rate for those years would be 5.25 (what you are paying now), so you are still ahead of the game. I would not agree to a 3-year adjustable with anything more than 2 percent per adjustment.
If you know you will be in the house for a while, however, you might want to look for a 5-year ARM. You will need to pay a slightly higher rate, but you will have a longer lock in period. Given that inflation definitely seems to be coming, that might be worthwhile.
· 8 years ago