When Should You Get a Convertible Mortgage?

A convertible mortgage is a new kind of home loan which aids a person to change from his/her existing adjustable-rate mortgage (ARM) to a Fixed-rate Mortgage (FRM) during the tenure of the loan.  In addition, the loan can be changed by paying a small penalty fee.

Need for Conversion

Adjustable-rate mortgage has a characteristic feature of interest rate fluctuation. It might affect homeowners, as sometimes the interest rates become high, owing to the market trend and other factors such as, inflation and a recession.

Conversion from FRM to ARM is also common depending upon how you wish to chart your repayment trend. The conversion fee might vary from $250 to $1250. If borrowers would like to beat the higher rate at a particular period, they switch over to a convertible mortgage as they believe that the interest rate may reduce after a certain span of time.

Pros and Cons

If you need to overcome the hassles of refinancing to attain a low interest rate, convertible mortgages are a good option. However, it may also demand a large payment towards the end of the loan which can be quite a pinch on your finances. Getting qualified for it could be quite cumbersome also, but if you have a good credit score this should not be a problem.

Convertible ARM

A convertible ARM is a type of adjustable-rate mortgage that provides the borrower with an opportunity to convert the loan into a fixed-rate mortgage at some point in the future. This type of loan allows the borrower to get the best of both worlds between adjustable-rate mortgages and fixed-rate mortgages. If interest rates in the industry are low, the individual can stick with the adjustable-rate mortgage and potentially save some money. Then, if interest rates rise, the borrower can pay the lender a fee and switch the loan over to a fixed-rate mortgage for the remainder of the term.