Convertible ARM

DEFINITION of 'Convertible ARM'

An Adjustable Rate Mortgage (ARM) that gives the borrower the option to convert to a fixed-rate mortgage. Convertible ARMs are marketed as a way to avoid rising interest rates and usually include specific conditions. The financial institution often charges a fee to switch the ARM to a fixed-rate mortgage.

BREAKING DOWN 'Convertible ARM'

Convertible ARMS can be used to lock in to an interest rate if the borrower feels the rates will increase. Restrictions include the ability to lock in only within a certain period, such as the first five years. The mortgages can also have beneficial terms; for example, the locked-in interest rate is often the lowest rate offered within the seven days prior to locking in (the interest rate is usually a little higher than the current market rate).