These days, it is amazing how many different mortgage options there are on the market. Some are better than others, and convertible financing can be one of the best.
A Quick Guide to Convertible Mortgage Loans
In the old days, property financing boiled down to two options. You could get a fixed rate loan or an adjustable rate mortgage. Both had their advantages and disadvantages.
With fixed rate loans, you had the comfort of knowing exactly what you were going to pay each month. There was a downside, however. If rates dropped below what you were paying, it could be aggravating knowing you were stuck with your fixed. You could refinance, but many people hate going through the application process and simply would not.
With adjustable rate mortgages, the advantages and disadvantages were more or less switched. Your initial interest rate was great because it was always a couple points below the rate being charged on fixed loans at that time. This saved you a lot of money on your monthly payments and the total interest you paid over the life of the loan. The downside was you had no stability. If interest rates rose, your month payment did as well. For many people, this caused cash flow problems since they often failed to budget for payment increases.
Given the advantages and disadvantages of traditional loans, many people wondered why better options couldn’t be put together. In search of the eternal profit, the mortgage industry started coming up with all kinds of different products. One of the best is known as the convertible loan.
A convertible mortgage is one that combines the best of the adjustable and fixed rate products mentioned above. The loan starts off as an adjustable rate loan. This gives you low initial payments, a boon for anyone. At a set time, usually year 4 or 5, you then have the option of “converting” your loan to a fixed rate for the rest of the term of the mortgage. All and all, it sounds like a pretty good situation and the loan has become popular with borrowers.
While convertible loans are great financing options, there are some things you need to be aware of. First and foremost, you can only convert one time. Second, the time period when you can convert is usually fairly short and the lender will rarely notify you that it is now or never. Third, you often will have to pay a fee to convert, a fee that can sometimes be sizeable.
At the end of the day, the convertible loan is a popular one with many borrowers and rightly so. As long as you understand what you are getting into, it can really be a choice option.
Dan Lewis is with Great Western Mortgage - providing
San Diego home loans.
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