Question:

Is the conversion option on an adjustable rate mortgage (ARM) of any benefit to the borrower?

Answer:

Not really. The conversion option on an adjustable rate mortgage (ARM) usually specifies the conditions to convert the existing adjustable rate mortgage into a specific fixed rate mortgage (FRM) after a specified period of time. The ARM with a conversion option usually costs more to the borrower than if they take a simple ARM with the intention of refinancing after several years.

Why is an ARM with a conversion clause more expensive and should I take it?

An ARM with a conversion clause will most often have a higher margin compared to other ARMs. Often, there is a better deal available - another ARM or FRM with better rates can be found and it is not that the conversion option on an ARM has no value. It does offer stability and could make sense later but it will be a really good deal only if you don't have to put up with a higher margin to get it.

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