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Unformatted text preview: the borrower is given the option to convert to a fixed–term, fixed– rate mortgage. This conversion may be a one–time option or the lender may offer the borrower an option to convert on any adjustment date. This conversion is normally offered on the 1–, 3–, or 5–year ARMs. Thus, if the borrower has a 3–year ARM with a conversion option at the first adjustment date the borrower could opt to convert to a fixed rate fixed–term 27–year mortgage at the first adjustment date. lithe convertible ARM gave the option of conversion at any adjustment date and the borrower opts to convert on the second adjustment date, then the borrower would have a fixed rate, fixed–term 24–year mortgage. Why would a borrower opt to convert? The borrower might opt to convert if the interest rate, at the time of adjustment had fallen to a level at which the borrower felt he or she could make the payments. For example, if a borrower had received an ARM in August 1999 when the rates on the 3 and 5–year ARMs were in the 9 to 10 percent range, then
Dynasty School (www.dynastySchool.com) 9-29 REAL ESTATE FINANCE
at the first adjustment date, When the rate on a fixed–term, fixed–rate mortgage had fallen to 8 percent, a conversion may have been a good option. The advantage of this conversion over time is a function of the level of interest rates. As with any type of loan, the convertible ARM will require the borrower to sign a note and deed of trust, but because this is not a standard ARM the lender may have to require the borrower and/or borrower to sign some additional documents. A lender has two options. One is to use one of the standard ARM notes, note addendum, and deed of trust addendum to the ARM deed of trust rider. If a lender uses these documents, two additional documents will have to be signed by the borrower and/or co–borrower, an Addendum To Adjustable Rate/Graduated Payment Note (Fixed Rate Conversion Option), and Addendum To Adjustable Rate /Graduated Payment Rider (Fixed Rate Conversion Option), (FNMA Form 3130 as illustrated in Form 9–2). These are to be used with an ARM based on a 1 –year Treasur...
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