An ARM conversion option is a clause associated with some adjustable-rate mortgages (ARMs) that permit the borrower to convert the variable interest rate to a fixed rate within a specific period or at certain future dates.
The general rule is that refinancing to a fixed-rate loan makes the most sense when interest rates are low. While no one can predict whether rates will go up or down, many homeowners are taking advantage of today's low rates to refinance from their adjustable-rate mortgage to a new fixed-rate mortgage. If you're among those considering this move, here are some points to be aware of.
An adjustable-rate mortgage (ARM) has a fixed interest rate for a specified initial term—say, five years—after which the interest rate may vary. If you are considering an ARM, it's essential to read all the details. Things to consider when looking at an ARM include:
An ARM may be a good option for those who plan to do something specific—such as pay off the loan, sell the home, or refinance—before the initial interest rate resets. However, borrowers should be willing to take on the risk that interest rates could rise and shouldn't assume they'll be able to refinance or sell the home before rates change quickly. You'll also want to compare the general interest rate with your loan's teaser rate—if you're still in the latter—and when your ARM's interest rate will reset.
Along with interest rate trends, consider your situation and whether a fixed rate makes sense. For example, people often opt for ARMs when they plan to be in a home for a limited, relatively short term. If that's still the plan, it's likely not worth the cost to convert. However, invoking the conversion might make sense if you think you will remain in residence for a while.
Remember, borrowers are generally allowed to invoke their conversion option clause within the first five years of their mortgage, so make sure any moves coincide with the time frame.
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