What is the primary risk associated with having an adjustable rate mortgage (ARM)?

The primary risk associated with having an adjustable-rate mortgage (ARM) is that interest rates could increase. ARMs have interest rates that are not fixed; instead, they adjust periodically based on a specific index or benchmark. This means that if market interest rates rise, the interest rate on the ARM can also increase, leading to higher monthly mortgage payments for the homeowner.

This variability can create significant financial strain, particularly for those who may have budgeted based on the initial, lower interest rates typical of ARMs. Homeowners might experience payment shock when the rates adjust upward, making previously affordable payments more difficult to manage. Understanding this risk is crucial for anyone considering an ARM, as it impacts both monthly budgeting and long-term financial planning.