has anyone had experience of converting an ARM to a fixed rate? Number 1, there were questions as to my new address (which I had updated at their prompting when I drafted my mortgage payment); whether or not I still "lived" in the house (I rent it now but lived there three years) as the mortgage language can state "if the loan conditions change" --
a loophole which gives the mortgage company an out for converting a loan if it has become non owner occupied property. Number 2, the market rate that the fixed is converted to was the rate on the date of the letter they wrote me offering the option (after I called and asked when they were going to put it in writing). Number 3 they only charged $250 to do the conversion but there was at least .5 pt. added to the market Treasury rate. When I tracked back to my banker who did the original loan, he seemed to be aware of all of the above...he added that when you do a conversion option you actually are rewriting the terms of the mortgage and the lender has more control than just rolling it into a new rate. Investors must be alert to this practice by lenders because they are told they can refi out of these ARMS up the road and they may not be able to. The incentive is to not convert to fixed but get that higher rate every year. Sounds like "universal default" language from credit card companies doesn't it?
Fascinating post. I had to read it a couple of times to understand what was going on, but then again I've never actually used an ARM to purchase a property.
Is there anything that you / an investor could do in order to refinance the property without being "forced" into terms from your original lender? For example what would have happened if you simply talked to a different broker and asked them to pay off the ARM for you?
Also you state that it was Treasury + .5 and I'm wondering what was the actual rate that the lender charged you?
I could have gotten another lender to pay off the ARM but the closing costs and possible points/rate (non owner occupied) would have been pricey. The conversion clause allows for the conversion for $250 which was a deal. The rate was 6.625% while the funds rate they used the date of their letter posted at 6.0% so ....they make a little. Also, what's great is the fixed loan picks up years where the other one left off....so you don't restart the years like you would if you went to another lender to refi. The straight conversion letter was sent also and that would have been 6.3% initially but after a year would go up with the index etc. etc. I'm convinced fixed is better for anyone due to the scrutiny of the lender.
I never trusted an adjustable rate mortgage. There's just no control over your mortgage payment, and more than ever the bank has the upper hand. I've seen excellent rental properties go through pre-foreclosure because the owner couldn't handle the mortgage payment. To make things worse, the property was occupied with a good tenant AND management staff.
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