Conversion Option

Filed Under »
Dictionary Says

Definition of 'Conversion Option'

A clause associated with some adjustable-rate mortgages that allows the borrower to convert the variable interest rate to a fixed rate within a certain time period, or at certain future dates. The conversion option is not free; an adjustable-rate mortgage with a conversion option will typically have a higher margin, and therefore higher fully indexed interest rate, or higher costs than an adjustable-rate mortgage without a conversion option.
Investopedia Says

Investopedia explains 'Conversion Option'

To analyze the economics of a conversion option, borrowers should total up the cost of the conversion option (an initial higher interest rate and/or higher loan costs) plus the cost of the actual conversion to a fixed rate, then compare this total to the costs of refinancing into a fixed interest rate at a future date.

Remember that a fee must often be paid to convert to the fixed rate, and the fixed rate that the ARM is converted to is typically based upon the market rate at the time of conversion plus a certain percentage. If the future refinancing costs are estimated to be less than the total costs of the conversion option, then the conversion option is not economical. The borrower would be better off with a traditional ARM with the intent to refinance into a fixed interest rate at a future date.

Articles Of Interest

  1. How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  2. Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  3. Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  4. How Mortgage Refinancing Affects Your Net Worth

    Find out how to determine whether refinancing will put you ahead or even more behind.
  5. 4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  6. 6 Tips For Selling Your Home Fast

    Find out what you can do to stand out from the competition and make your home an easy sell.
  7. 5 Smart Ways To Use Your Tax Return

    This year, find out how to stretch your tax refund further to strengthen your future.
  8. Common Liabilities That Hurt Your Net Worth

    Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
  9. The Dangers Of A Reverse Mortgage

    In many circumstances, a reverse mortgage can be a risk to your financial security. Here are six dangers you should consider before signing on the bottom line.
  10. Automatic Cancellation Of PMI When You're Underwater On Your Mortgage

    You might be suprised to learn that after reaching certain criteria, your PMI will be automatically cancelled.
comments powered by Disqus
Marketplace
Hot Definitions
  1. Yield Elbow

    The point on the yield curve indicating the year in which the economy's highest interest rates occur. The yield elbow is the peak of the yield curve, signifying where the highest interest rates occurred.
  2. Xenocurrency

    A currency that trades in markets outside of its domestic borders.
  3. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.
  4. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.
  5. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.
  6. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=aa57d4f544d0b323c7c422afc8d54114