Convertible Mortgage (ROL)

It is also called reduction option loan (ROL) or in some locations, the reducing interest loan (RIL), or mortgage (RIM). It is a short-term mortgage that can at any time be converted into a longer term closed mortgage without penalty. It is similar to a balloon mortgage, Convertible Mortgage Loans allow you to start off with a low variable rate and then ‘convert’ to a fixed rate before a designated period of time. The conversion is done for a moderate fee, and while the new conversion rate is competitive, it is typically a little higher than the market rate.

Typically, these ARM Loans are used when the interest rate is unusually high so that borrowers can qualify for a mortgage but still be able to switch to a lower interest rate later without refinancing. However, borrowers may want to lock in if the interest rates begin to rise as well.

Less frequently, but still possible, a Convertible Loan may be a Fixed Rate Loan with an option to convert if the market interest rates drop since the time of purchase; allowing the borrower to lock in at an even lower interest rate before a specified period of time.

Advantages: Convertible mortgages let you have the advantages of both fixed- and adjustable-rate loans. Typically, these ARM Loans are used when the interest rate is unusually high so that borrowers can qualify for a mortgage but still be able to switch to a lower interest rate later without refinancing. However, borrowers may want to lock in if the interest rates begin to rise as well.

Disadvantages: It requires a lump sum payment of the remaining balance at the time. When using the conversion option, rates could be higher at that time. You may not qualify to refinance at the time the final payment is due.