My Mortgage/Interest-Only…What’s the smartest thing to do?

OK, first a little background…

I have 8 years to go on my 10 year interest-only period which ends in 2016. (Loan details: I put 0 down. I am paying 6.5% and 5.5% on my 80/20 respectively.)

However, in 2011, the rates becomes adjustable (2% cap, Annual adjustment. 5% first adjustment cap). We’re not planning to be here more than about 8 more years anyway, then we plan to sell and leave California.

If rates went up 2% or 3%, I could still make the payments comfortably come 2011 because I still won’t have principle kicking in.

We live a couple miles from the beach in a good neighborhood that has dropped 10-15% in the past 2 years. I owe almost exactly the same on my home as what I paid for it. (Prices went up a bit after I bought in the area and have come back down in the last 12 months.) We’re saving money now to add an additional room/bedroom in early 2010 if the rates are still reasonable and we don’t need to use the saved cash to off-set higher payments.

I’m not in a position right now to throw 5%, 10% or 20% into a +$ 700K jumbo loan to refinance, which is what I’d have to do in this market. And jumbo loan interest rates are much higher than the 6.5% I have now. Not sure I want to do that anyway given that I don’t plan to be in this home 10+ more years.

Any advice? Suggestions about what the best thing to do would be?

Smart to sit, save what I can and not stress about refinancing at this point?

Or is there something smarter to do?

I am a mortgage broker searching for a funding source to refinance a 2nd home in northern California. LTV will be under 75%, credit scores over 700 and full doc. Property is the question, exterior is log cabin style and rock facia. Interior is finished drywall with log style beams in roof and rafters. Loan amount will need to ba jumbo – $ 550,000. Does not qualify as conforming jumbo. Any thoughts?

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