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