convertible ARM

convertible ARM
An ARM for which the borrower has the option to convert from a floating-rate loan to a fixed-rate loan. Convertible ARMs can typically be converted in the first through fifth years of the mortgage loan. Because borrowers can exercise their conversion option for a modest fee, conversion is more attractive to borrowers than the alternative of obtaining a nonconvertible ARM and then later refinancing with a fixed-rate loan when prevailing rates have fallen. Consequently, prepayment speeds for convertible ARMs are faster than prepayment speeds for nonconvertible ARMs. American Banker Glossary

Financial and business terms. 2012.

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