Convertible Fixed-Rate

Pros
Sometimes called a Reduction Option Loan (ROL), this loan combines the features and benefits of a fixed-rate mortgage with an adjustable-rate mortgage. ROL loans allow you to pay a fixed payment for a certain amount of years, then revert to an adjustable mortgage payment schedule. The amount of time you are allowed to make fixed payments is outlined in your mortgage contract. 

For more information on how adjustable-mortgage payment schedules work, see the section on Adjustable-Rate Mortgages.

If you choose this loan product, include a clause in your mortgage agreement that allows you to convert the loan permanently to a fixed-rate mortgage, especially if interest rates begin climbing. Typically, lenders will allow you to exercise this option between the 13-59th payments (years 2-5), especially if interest rates fall at least two percentage points below the initial interest rate your loan started with during that period. 

Cons
The loan agreement might require you to pay an upfront fee to exercise your option to convert the loan permanently to a fixed-rate mortgage. In addition, interest rates for these loans are sometimes higher than on other ARM loans. While these loans give more buying power than a traditional 30-year fixed rate mortgage (i.e., a lower interest rate means you can take out a higher loan amount), if rates increase to a high level and fail to come down, this type of mortgage could end up costing you more in the long run.