Convertible ARM

How It Works

A convertible ARM operates like a standard adjustable-rate mortgage with one additional feature: a built-in option to switch from an adjustable rate to a fixed rate. This conversion right is written into the original loan documents at closing and typically can be exercised during a defined window, commonly between months 13 and 60 of the loan term. The borrower must submit a written request and pay a conversion fee, which generally ranges from $250 to $1,000.

Key Characteristics

Unlike refinancing, conversion does not require a new appraisal, income verification, or credit re-qualification. The converted fixed rate is determined by a formula in the original note, typically the prevailing market rate plus a premium of 0.25% to 0.375%. This means the converted rate will be slightly higher than current market rates, but the transaction costs are far lower than a refinance. For a full explanation of conversion mechanics, rate determination, and strategic considerations, see Convertible ARM - How ARM-to-Fixed Conversion Works.

Current Availability

Convertible ARMs have become uncommon among large national lenders. Portfolio lenders, credit unions, and community banks are the most likely sources for this product. Fannie Mae's Selling Guide still includes provisions for convertible ARMs, but origination volume remains minimal.