An additional protection for most ARM and balloon loan borrowers is the option to convert into a long-term fixed-rate loan. The conversion option is not a refinance, although it looks and acts like one. Rather, the conversion option amends the original mortgage loan note, without substantially changing the mortgage and title record. For example, an ARM loan borrower who is in the third year of her loan can convert it into a 27-year fixed-rate loan. The interest rate of the new fixed-rate loan will be based on current market rates, as predefined in the conversion option clause Most lenders charge a fee of $200 to $500 to prepare, execute and record the conversion documents.
Borrowers must also meet certain requirements to exercise the conversion option. They cannot be delinquent on the account or have an unacceptable payment history. In addition, there will be a time limit to the option. With most loans, borrowers must exercise the conversion option after the first full year and before the end of the fifth year.