Convertible ARMs

An adjustable rate mortgage is one where the interest rate charged is linked to an economic index. If the index goes up the interest rate charged on the mortgage interest rate will increase (advantageous to the lender) but if the index goes down then the interest rate charged will go down (advantageous to the borrower).

A convertible adjustable rate mortgage is one where the borrower can, for a fee, convert from an adjustable rate mortgage to a fixed rate mortgage. The process is easy with a minimum of paperwork however, there is usually a fee involved in the process. As well as the fee charged the lender usually charges a slightly higher interest rate, sometimes on the original convertible ARM, sometimes on the new fixed rate mortgage, and sometimes on both the mortgages (the original ARM and the new fixed mortgage).

The conversion from adjustable to fixed rate mortgage can usually only be done at specific times. Some lenders allow conversion anytime after the first year of the mortgage while some allow conversion only on the anniversary date of the original mortgage. If you are considering a convertible adjustable rate mortgage be sure to find out when your lender allows the conversion to take place.

Advantages:

• If interest rates start to increase you can for a small fee switch to a fixed rate mortgage knowing that you are protected from further rate increases should they occur.
• Anyone who is of the opinion that interest rates are going to decrease in the near future may also wish to invest in a convertible ARM. In the event they are right they can lock into the new, lower, interest rate available to them.
• If for some reason you think your credit rating will become poorer in the future (for instance if you feel you marriage may end) and you think you would be unable to get a good rate in the future. Then you should consider a convertible adjustable mortgage.

Disadvantages:

• There is a small fee to pay the lender to switch the mortgage from a variable one to a fixed one.
• The lender usually charges a slightly higher interest rate. Some lenders charge more on the original adjustable rate mortgage for offering you the convertible option while some lenders charge a slightly higher interest rate on the new fixed rate mortgage. Some lenders charge more for both the original adjustable rate mortgage and for the new fixed rate mortgage.