Converting an Adjustable Rate Mortgage to a Fixed Rate Mortgage

When it comes to choosing a mortgage loan, many prospective home buyers have to figure out which mortgage option is best for their needs: A fixed rate mortgage or adjustable rate mortgage. Making the wrong decision will often result in the need for an adjustable rate mortgage conversion.

Why Do ARM Conversions Happen?

A fixed rate loan promises stability when it comes to paying the monthly mortgage payment. However, it also has the downside of locking you into a mortgage interest rate which remains static even if interest rates fall.

Anyone who opted for an adjustable rate mortgage (ARM) is this case would be celebrating the fact that their monthly mortgage payments are falling, too. Of course, choosing an ARM can be just as risky because when interest rates rise, so do your mortgage payments–which can really take a bite out of your wallet. In fact, a rise in interest rates can often make many people with an adjustable rate mortgage switch over to a fixed-rate mortgage instead This process known as conversion.

How Adjustable Rate Mortgage Conversions Work

An adjustable rate mortgage conversion involves converting the ARM structure of your loan into that of a fixed-rate mortgage. To get a conversion, you simply pay a fee and your ARM officially converts over to a fixed-rate mortgage.

There is one big caveat when going through an ARM conversion as opposed to obtaining a fixed-rate mortgage from the beginning. Pursuant to the terms of your loan, you may get a new fixed rate, but higher than current rates. This might make an ARM conversion not worth the trouble.

For example, if interest rates are falling to the point that you want to switch to a fixed-rate mortgage, you might not get the current low interest rate that’s making you want to convert in the first place. The interest rate you end up with could be a point or two higher, depending on the terms of your loan. If you’re thinking about converting your ARM to a fixed-rate mortgage, check with your mortgage lender to see what they have to offer. Also make sure you do your homework so you know exactly how the terms of your loan, including the interest rate, will change.