A fixed-rate conversion option is a built-in feature in certain adjustable-rate mortgages (ARMs) that permits borrowers to convert their loan from a variable interest rate to a fixed interest rate within a specified timeframe. Unlike a full refinance, this conversion usually requires no new underwriting, income verification, or property appraisal, and involves lower fees than refinancing. This makes it a convenient way to lock in stable monthly payments when interest rates are rising or borrowers seek predictable budgets.
How Does a Fixed-Rate Conversion Option Work?
When you open an ARM, it might include a conversion option that you can exercise during a designated “conversion window” — often after the first adjustment period and before a set loan year, such as years 2 to 7. Upon conversion, your new fixed interest rate will be based on current market rates, not the original ARM rate. You typically pay a conversion fee that is less expensive than refinancing closing costs.
Why Use a Fixed-Rate Conversion Option?
Borrowers often choose this option to avoid rising ARM rates, reduce payment volatility, or align with new financial goals like holding the home longer than planned. This option is valuable for those who want fixed-rate stability without the hassle and costs associated with refinancing.
Who Benefits Most?
- Borrowers expecting increasing interest rates.
- Those seeking predictable monthly payments.
- Individuals with improved financial profiles who might secure better rates.
- Borrowers wanting to avoid a full refinance process.
Real-World Example
Consider Sarah, with a 5/1 ARM that just completed its fixed period. Facing rising market rates, she uses her conversion option to lock a fixed rate slightly below expected adjusted ARM rates, avoiding refinancing costs and new underwriting hassles.
Key Considerations
| Feature | ARM | Fixed Rate (Post-Conversion) |
|---|---|---|
| Interest Rate | Variable after initial fixed period | Fixed for the remaining loan term |
| Monthly Payment | Changes with rate adjustments | Stable and predictable |
| Conversion Cost | Conversion fee applies | No refinancing closing costs |
| Refinancing Cost | High if you refinance instead | N/A |
| Rate Risk | High if rates rise | Low once fixed |
| Peace of Mind | Lower | Higher |
Before converting, compare offered fixed rates with current market rates and consider your loan term, future plans, and conversion fees. Not all ARMs offer this option, so review your loan documents or contact your lender.
Common Misconceptions
- Not all ARMs include a conversion option—verify your loan.
- Conversion resets your interest rate to current market levels, not your original ARM rate.
- Conversion is simpler and less costly than refinancing.
- Conversion is only available during specified periods outlined in your loan agreement.
FAQs
Can I convert if my lender doesn’t offer this option?
No. Without this built-in feature, the only path to a fixed rate is a full refinance.
Does converting affect my credit score?
Typically, no. Conversion is part of your existing loan. Refinancing may affect your score due to a new loan application.
How do I know if the conversion rate is competitive?
Compare it to current fixed mortgage rates and factor in conversion fees to assess overall cost.
For more details, see our articles on Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages.
Sources:
- Consumer Financial Protection Bureau, Adjustable-Rate Mortgages (ARM): https://www.consumerfinance.gov/ask-cfpb/what-is-an-adjustable-rate-mortgage-en-114/
- Investopedia, Fixed-Rate Conversion Option: https://www.investopedia.com/terms/f/fixed-rate-conversion-option.asp
External authoritative link: Consumer Finance.gov – Mortgages
