If you are considering mortgage refinancing with a convertible Adjustable Rate Mortgage to limit your risk, the added convenience of converting your loan to a fixed interest rate could cost you a bundle. There are certainly no free lunches when it comes to mortgage refinancing and convertable options are no exception. Here are three tips to help you avoid overpaying for a convertible adjustable rate loan when mortgage refinancing.

Many mortgage companies push convertible Adjustable Rate Mortgages because they can qualify homeowners at a lower interest rate claiming when interest rates drop you can convert your mortgage to a fixed interest rate. When it comes to convertible Adjustable Rate Mortgages, the cost outshines the horsepower. You will pay a higher interest rate and very few borrowers every exercise their option to convert. Heres why convertible Adjustable Rate Mortgages are a bad deal.

I. You get a higher mortgage rate.

Most homeowners think they can convert at the prevailing market rate. This simply isnt true; when converting your Adjustable Rate Mortgage to a fixed interest rate, youll pay a rate premium of .25 to 1 percent or more.

II. Youll pay a conversion fee.

In addition to not getting the market interest rate, youll have to pay your lender a conversion fee ranging from $100 to as much as 1% of your loan balance. Another hidden fee buried deep in your loans disclosure statement.

III. Youll pay up front costs.

You will usually have to pay for the conversion option at the time you close on your Adjustable Rate Mortgage. If the lender doesnt charge you an up-front fee, youll pay with a higher starting mortgage rate or higher loan origination fees.

Suppose youve got the convertible loan option. Can you convert the loan whenever you want to? Probably not, most often you can only convert your mortgage between the thirteenth and sixtieth month (up to the fifth year) of a 30 year loan. This is why most homeowners never convert their Adjustable Rate mortgages. If your mortgage company is offering a convertible option at no cost, consider what they are marking up before jumping on the offer. Otherwise avoid paying up-front costs as your convertible option will most likely be a clunker.

You can learn more about your mortgage refinancing options including costly mistakes to avoid by registering for a free mortgage tutorial.

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Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. For a free “Mortgage Refinancing Tutorial,” which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.

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