Conversion Option

The financial crisis was quite a doozy for home buyers. One of the major reasons for default on so many mortgages was tied to balloon rates, or hikes in variable interest rates after a specific period in the contract.

Starting your mortgage with a variable interest rate might be smart. They can sometimes mean lower interest rates and lower payments. But if the Federal Reserve gets frisky and the economy heats up, or the market tanks and concerns about the dollar drive rates higher, you might end up paying more than you expected.

If you're buying a house with an adjustable rate mortgage, one of the things that's nice to have is a conversion option.

A conversion option gives you the opportunity to switch that adjustable rate to a fixed rate before a specific date. So, let’s say you started your ARM at 3.75% and the fixed rate option was 4.5%. You might have a conversion option to lock in a rate of around 4.75% after seven years. If the adjustable rate jumps to 5.5% during that time, you could be able to lock in that fixed rate.

Keep in mind that it isn’t cheap. You’ll pay a conversion fee. Banks are designed to make money and then reach into your pocket for whatever you have on you.

Conversions also exist in the life insurance industry. Certain policies will allow individuals to convert term life insurance into whole life policies within a specific timeframe.

But that would mean you now had a whole life policy. Which...is a pretty bad investment.