The Ins and Outs of Convertible ARMs

We have heard of fixed-rate mortgages and adjustable rate mortgages, but what is a convertible adjustable-rate mortgage?  Like an ARM,  the Convertible ARM starts with a lower mortgage rate.  This fixed-rate can last 5, 7, or 10 years.  Once the initial time frame is over, with a basic ARM, the rate will adjust every six months or one year until the mortgage is paid off.  You would have to refinance to get a fixed rate for the remainder of the mortgage term.  With a Convertible ARM, instead of refinancing after the initial term, you can choose to convert the ARM to a fixed-rate mortgage, without refinancing.  This conversion costs less than going the refinancing route.  Refinancing typically includes a refinancing charge of 2% to 5% of the loan amount.

There are a few disadvantages of this type of loan.  You are limited as to when you can convert the Convertible ARM to the fixed-rate mortgage.  These dates are determined by the lender.  Also, as we have seen lately, the interest rates can change quite a bit.  Once your initial rate is over, make sure you are prepared for a hike in the mortgage, which may be great depending on the mortgage rate.

Read the Original Article Here: What Is a Convertible ARM? The Pros, Cons, and When It Makes Sense To Get One