Skip to Main Content

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 mortgage calculator to figure out how much your loan will be and what your annual interest rate will look like.



More From Bankrate