Conversion Option
The financial crisis was quite a doozy for home buyers. One of the major reasons for default on so many mortgages was tied to balloon rates, or hikes in variable interest rates after a specific period in the contract.
Starting your mortgage with a variable interest rate might be smart. They can sometimes mean lower interest rates and lower payments. But if the Federal Reserve gets frisky and the economy heats up, or the market tanks and concerns about the dollar drive rates higher, you might end up paying more than you expected.
If you're buying a house with an adjustable rate mortgage, one of the things that's nice to have is a conversion option.
A conversion option gives you the opportunity to switch that adjustable rate to a fixed rate before a specific date. So, let’s say you started your ARM at 3.75% and the fixed rate option was 4.5%. You might have a conversion option to lock in a rate of around 4.75% after seven years. If the adjustable rate jumps to 5.5% during that time, you could be able to lock in that fixed rate.
Keep in mind that it isn’t cheap. You’ll pay a conversion fee. Banks are designed to make money and then reach into your pocket for whatever you have on you.
Conversions also exist in the life insurance industry. Certain policies will allow individuals to convert term life insurance into whole life policies within a specific timeframe.
But that would mean you now had a whole life policy. Which...is a pretty bad investment.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]