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Financing
Financial How To's
When to Convert Your ARM
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When interest rates drop, adjusted rate mortgage holders may wonder if it's a good time to convert their loans to a fixed rate. They may not have the option -- many ARMs do not contain conversion clauses. The only way these loan holders can benefit from the interest rate change is to refinance.
If, however, your ARM contains the clause, it is best to look at the interest rate to which the loan will convert. Many conversion clauses specify that the loan can only be converted in the first one to five years, and that the loan will convert to a higher interest rate than the current offered fixed rate.
So why convert rather than refinance? For one, conversions are cheaper. Usually, they're subject to s set fee, such as $300 to $500 -- much less than closing costs required for refinancing. And if your mortgage is a jumbo mortgage -- more than $207,000 -- savings can be substantial.
Most ARM borrowers try to catch the market at a cyclical low point, and convert before their index, in many cases, Treasury Bonds, bounce back.
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