Convertible ARM

AAA

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.

INVESTOPEDIA EXPLAINS '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).

RELATED TERMS
  1. Subprime Borrower

    A person who is considered a higher-than-normal credit risk. ...
  2. Fixed-Period ARM

    An adjustable-rate mortgage (ARM) with an initial fixed-interest-rate ...
  3. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  4. Payment Option ARM

    A monthly adjusting adjustable-rate mortgage (ARM) which allows ...
  5. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  2. Credit & Loans

    Mortgage Points: What's The Point?

    Learn how to pay less for your home in the long run, or save in the short run.
  3. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  4. Home & Auto

    Adjustable-Rate Mortgage Indexes: Know Your Benchmark

    Understanding these benchmarks can help you select the most competitive adjustable-rate loan.
  5. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Credit & Loans

    Mortgage Basics

    Learn how to navigate what may be your biggest and most important loan.
  7. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  8. Credit & Loans

    Smart Ways to Use a Mortgage Calculator

    When you're buying a home, it's essential to do due diligence about the true costs. Mortgage calculators will show you if you can afford the purchase.
  9. Home & Auto

    How to Live Mortgage Free in a Tiny House

    Downsizing to a much smaller home – no more than 500 square feet – on your own or rented land can be a smart way to offload mortgage debt.
  10. Credit & Loans

    Calculating Interest Expense

    Interest expense is the cost of borrowing money.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!