Texas Real Estate Sales Agent ExamFinancingMedium
A homeowner is considering refinancing their mortgage. Their current loan has a fixed interest rate, but they are concerned about rising interest rates in the future. Which type of loan would allow them to convert their existing adjustable-rate mortgage (ARM) to a fixed-rate mortgage?
- AReverse mortgage
- BConvertible ARM
- CBalloon mortgage
- DGraduated payment mortgage (GPM)
Show answer & explanationAnswer & explanation
Correct answer: B. Convertible ARM
A convertible ARM allows the borrower to convert their adjustable-rate mortgage to a fixed-rate mortgage at certain points during the loan term, which can be beneficial if interest rates are expected to rise.
Why the other options are wrong
- A. A reverse mortgage allows homeowners to convert home equity into cash, primarily for seniors, and does not involve converting an ARM to a fixed rate.
- C. A balloon mortgage has a large lump sum payment due at the end of the term, not a conversion feature.
- D. A GPM has lower initial payments that gradually increase, not a conversion feature.
Convertible ARM
A convertible adjustable-rate mortgage (ARM) grants the borrower the option to convert the loan into a fixed-rate mortgage during a specified period.
- Offers flexibility to lock in a rate
- Conversion typically incurs a fee
- Useful for managing interest rate risk
Memory trick: A Convertible ARM allows a Change from Adjustable to Fixed.