Even though adjustable rate mortgages ("ARMs") offer low introductory rates, which equal low monthly payments, the rate is not permanent. In most cases, borrowers only receive the initial rate for a fixed period. Once this period concludes, the rate adjusts to the current market rate. Regrettably, the rate continues to adjust every year for the remainder of the loan.

Ordinarily, borrowers do not keep adjustable rate mortgage for the life of the home loan. Due to fluctuating rates, a sudden rate increase could greatly affect a borrower's ability to afford their home. To avoid the possibility of a higher payment, most borrowers sell their home before the rate changes, or refinance and switch to a fixed rate mortgage. Certain adjustable rate mortgages include another useful option - a conversion option.

If choosing an adjustable rate mortgage, borrower should inquire as to whether they are receiving a convertible ARM. A wrong assumption is that all adjustable rate mortgages have a conversion option. However, this is not the case. If the adjustable rate mortgage excludes a conversion option, refinancing the mortgage is the only alternative for acquiring a fixed rate.

Even though refinances are common, the cost of creating a new mortgage loan is high. Borrowers are obligated to pay settlement costs and other mortgage fees. If refinancing with an existing lender, select fees may be waived to reduce the costs. When exercising a conversion option, there are no settlement costs.

Conversion options have certain limitations. For this matter, borrowers must convert to a fixed rate within a specific timeframe. Mortgage providers will disclose the window for converting. Typically, borrowers must take advantage of the conversion option after the first year, but before the fifth year concludes.

While convertible ARMs offer a convenient feature, there is a downside to a conversion option. For starters, the rates on these adjustable rate mortgages can be higher than non-convertible ARMs. Secondly, there is a fee for converting an adjustable rate mortgage. The typical fee is approximately 1% of the total loan amount.