What is a Convertible ARM?

The convertible ARM is a type of adjustable rate mortgage that allows for the conversion to a fixed rate of interest at specific points during the life of the mortgage. In general, the conversion of an ARM cannot take place until the mortgage has been in place and has been kept current for at least thirteen months from the date of issue. Often, the terms and conditions defined in a convertible ARM will not allow the conversion to take place until at least three calendar years have passed since the mortgage went into effect.

One of the main benefits to going with a convertible ARM is that the borrower may be able to take advantage of a better interest rate at some future point. Since interest rates can and do fluctuate over time, it is possible that the borrower may be able to enjoy a period of several years where the applied interest rate is very favorable in comparison to the fixed rate that was available at the time the mortgage agreement was drafted. When this type of situation exists, the borrower can realize a significant savings in interest costs by choosing to go with an adjusted rate rather than a fixed rate mortgage.

At the same time, the option to convert that is inherent in the structure of a convertible ARM also means the borrower can exercise the option to move from an adjusted rate environment into a fixed-rate mortgage with relative ease. This may become attractive when interest rates reach a low point and all indications are that the rate will not continue to drop for most of the remaining years of the mortgage. Choosing to convert at this point in time will lock in a low rate that the borrower can live with, and also offer protection from any type of increase in interest rates that may take place in the future.

The convertible ARM offers an excellent means of planning for the future when there is some uncertainty about what the future may hold. By beginning with an adjustable rate, the borrower can enjoy a flexible rate of interest that may prove to be helpful in the future. At the same time, the convertible ARM allows the borrower to take advantage of a low point in interest rates to eventually obtain a more agreeable fixed rate than was available at the time the agreement was put in place.