The popularity of home loans that start with an adjustable rate but offer an optionto switch to a fixed rate is growing, according to lenders.
These so-called convertible loans come with maturities. that range from six months to more than 10 years.
Centerbank Mortgage Co., Waterbury, Conn., is reporting increased activity in convertible loans, said Thomas C. Brown, president and chief executive officer.
This has happened despite the that Centerbank is not currently marketing convertible loans aggressively, he said.
"It makes sense for people to consider convertible loans," Mr. Brown said.
Starting rates are often low, he said.
And the maximum adjustment caps largely protect borrowers against interest rate risk.
The public's interest is gravitating more toward Centerbank's longer-term convertible loans, like live-year adjustables, Mr. Brown said.
Five-year convertibles are also gaining popularity at Metropolitan Service Corp., Santa Monies, Calif., said Keith Guy, president and chief executive officer.
Robert R. Davis, chief economist at the Savings and Community Bankers of America, the thrift industry trade group, said people are more sensitive today to rising interest rates.
That causes borrower's to opt for the interest rate protection of convertible loans, he said.
Some borrowers find it more economical to buy a convertible loan if they expect to refinance soon. Convertible loans perform like refinancings-providing borrowers' with fixed rates - but without the high costs.
Metropolitan's Mr. Guy said only 5% to 10% of convertible loans are switched to fixed rates.
Most adjustable-rate loans at Huntington Mortgage Co. have options that let customers convert the mortgages to fixed rates. But contrary to the situation at Centerbank and Metropolitan, said Gordon R. Rogers, senior vice president, the Columbus, Ohio, lender is finding more interest in shorter-term convertible loans.
Mr. Rogers said he believes borrowers are expecting interest rates to come down again.
Convertible loans give them an option to take advantage of lower rates.
But Mr. Guy, at Metropolitan, emphasized that thrifts' convertible products have better prices than those at mortgage banks.
He said Metropolitan's convertible-loan volume has suffered because of that.