Convertible Arm

An Adustable Rate Mortgage that offers the borrower the option to convert payments to a fixed-rate schedule at a specified period within the term of the loan. Conversion is made for a nominal fee, and the interest rate on the fixed-rate loan is determined by a rule specified in the ARM loan agreement.
Example: Conroy obtained a convertible ARM that allows him to convert the loan to a fixed-rate loan anytime between the second and tenth year of the loan term. Conversion will cost Conroy $100, and the interest rate on the new loan will be 1 percentage point above the average contract rate on fixed-rate mortgage loans closed in the nation during the previous month. The amortization term of the new loan will be 25 years from the time of conversion.