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Conversion clause

You need to understand what a conversion clause is. Here’s what to know.

What is a conversion clause

A conversion clause is a provision that may appear in an adjustable-rate mortgage, allowing the loan to be changed to a fixed-interest rate loan, usually for an additional charge.

Deeper definition

A conversion clause is a clause within an adjustable-rate mortgage loan that allows a borrower to switch from an adjustable-rate mortgage to a fixed-rate mortgage. A change like this is usually allowed at the end of the first adjustment period, if a conversion clause exists for that particular loan. Most of the time, choosing to take advantage of this clause requires an additional charge or fee of some kind. An adjustable-rate mortgage has an interest rate that can fluctuate over time, which means it may go up or down, depending on various factors. This compares to a fixed-rate loan, which has a set interest rate that won’t change over time and will remain the specific set amount for the duration of the loan’s repayment.

Conversion clause example

If you have a mortgage loan on your home that currently has an adjustable rate, but you run into a financial situation where an adjustable rate is too unpredictable, you may be able to change your rate to a fixed rate. If your mortgage loan contract has a conversion clause, you will be able to request that your loan be switched from an adjustable rate to a fixed rate after paying a fee. This allows you to have an interest rate that remains the same for the duration of your loan, making managing payments and interest a lot easier and more predictable. Are you planning on buying a new home and need mortgage loan information? Use this handy to figure out how much your loan will be and what your annual interest rate will look like.

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