Many Adjustable Rate Mortgages have an option to convert the loan to a fixed rate. If and when the option is exercised, the interest rate becomes fixed for the remainder of the life of the loan. The interest rate that is fixed is generally the equivalent of a zero point fixed rate at the time of conversion (it is usually based upon the Fannie Mae net yield plus the specified margin). Some Convertibles can be exercised at any time from the first month’s payment to the fifth year; others have more restrictive time frames. Most Convertible ARM’s require written notice and the conversion is “free.” Some Convertibles require a fee (usually $250) at the time of conversion.

BENEFITS:

The Convertible ARM gives the borrower more flexibility and more security. It allows the flexibility to switch from an ARM to a fixed rate if that seems more advantageous in the future. This could be accomplished by refinancing in most cases, but a declining property value or credit issues could preclude a later refinance. Also, the cost of refinancing, even with a zero-point rate, will be more. The Convertible gives the borrower some security and more peace of mind that they might not otherwise have with an ARM. However, the rate of a Convertible ARM is often higher than a non-convertible ARM. Michael Dunsky can help you decide which is best for you.