What is the primary disadvantage of an adjustable-rate mortgage (ARM)?

The primary disadvantage of an adjustable-rate mortgage (ARM) lies in the structure of its interest rates, which can fluctuate over time. When the interest rates increase, the monthly payments on an ARM can also rise significantly, resulting in higher costs for borrowers. This can lead to financial strain, especially if the increases are substantial or the borrower’s financial situation changes during the life of the loan. In contrast, fixed-rate mortgages provide stability with consistent monthly payments, making them a more predictable financial commitment.

Higher initial fees, large down payments, or restrictions on payment structures are not inherent disadvantages unique to ARMs. While it's true that some ARMs might come with higher start-up costs, many are offered with lower initial fees compared to fixed-rate options. The requirement for a large down payment often relates more to the type of mortgage or the lender than the fact that the mortgage is an adjustable-rate one. Similarly, payment terms don’t typically restrict the borrower from paying off the loan earlier—this is common in various mortgage types, not just adjustable-rate loans. Hence, the potential for rising monthly payments due to fluctuating interest rates stands out as the critical disadvantage of ARMs.