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A convertible mortgage generally refers to a loan in which the lender has the option to convert some or all of the loan into an equity interest in the property securing the loan. The word "convertible" refers to the fact that all or part of the loan can be converted into an equity interest, and the word "Mortgage" refers to the fact that the loan is secured by a mortgage on the real estate. The conversion, however, does not necessarily have to be into an ownership interest in the real estate itself; instead, it can be a conversion into an interest in a partnership or corporation that owns the real estate.
TERMS * Convertible mortgages can have a variety of terms. The mortgage can provide that it can be converted on a fixed date or during a period of time and that the time to convert can be during the term of the loan or at the maturity of the loan. The mortgage can also provide that only part of the loan can be converted into an equity interest and that the rest of the loan remains secured by the real estate, or the mortgage can require the lender to pay an additional amount on top of the loan balance at the time of the conversion.
In addition, convertible mortgages can have a variety of different formulas for determining the conversion price, such as:
* A fixed price (e.g. the outstanding balance on the loan);
* A price based on an appraisal; or
* A price tied into an index, such as an inflation index.
Finally, the interest rate on the mortgage can vary from a fixed rate or floating rate mortgage to a participating mortgage where the lender receives a portion of the cash flow from the property.
PUTS AND CALLS
* Although most convertible mortgages simply involve an option on the part of the lender to convert into equity, some convertible mortgages more complicated. For example, some convertible mortgages not only give the lender an option to acquire an equity interest (a "call") but also give the borrower an option to make the lender acquire an equity interest (a "put"). As noted below, is at has been used when the lender and...