What does a conversion clause in an adjustable-rate mortgage (ARM) allow?

What does a conversion clause in an adjustable-rate mortgage (ARM) allow?

• A. It allows a borrower to refinance their mortgage at lower rates
• B. It allows the loan to convert to a fixed-rate at some point
• C. It prevents the lender from charging fees
• D. It guarantees fixed monthly payments

Answer: (B)

A conversion clause in an adjustable-rate mortgage (ARM) provides the borrower with the option to convert their adjustable-rate loan into a fixed-rate mortgage at some point during the loan term. This feature is beneficial for borrowers who may want to lock in a stable interest rate if they anticipate that interest rates will rise in the future. By utilizing this clause, borrowers can gain peace of mind knowing they have the flexibility to transition to a fixed rate, thereby potentially avoiding payment increases associated with the fluctuating rates of an ARM. In this context, the other options do not accurately describe the function of a conversion clause. While refinancing may offer lower rates, that is not what the conversion clause specifically addresses. Likewise, preventing lender fees or guaranteeing fixed monthly payments are not functions of a conversion clause, as they pertain to other aspects of loan agreements and do not relate directly to the flexibility provided by converting an ARM to a fixed-rate mortgage.

A conversion clause in an adjustable-rate mortgage (ARM) provides the borrower with the option to convert their adjustable-rate loan into a fixed-rate mortgage at some point during the loan term. This feature is beneficial for borrowers who may want to lock in a stable interest rate if they anticipate that interest rates will rise in the future. By utilizing this clause, borrowers can gain peace of mind knowing they have the flexibility to transition to a fixed rate, thereby potentially avoiding payment increases associated with the fluctuating rates of an ARM.

In this context, the other options do not accurately describe the function of a conversion clause. While refinancing may offer lower rates, that is not what the conversion clause specifically addresses. Likewise, preventing lender fees or guaranteeing fixed monthly payments are not functions of a conversion clause, as they pertain to other aspects of loan agreements and do not relate directly to the flexibility provided by converting an ARM to a fixed-rate mortgage.