What is the primary risk associated with adjustable-rate mortgages (ARMs)?

The primary risk associated with adjustable-rate mortgages (ARMs) lies in the potential for increased monthly payments due to rising interest rates. ARMs typically begin with a lower initial interest rate that is fixed for a certain period. After this initial period, the rate can adjust at specified intervals based on market conditions, which often leads to fluctuating monthly payments.

As interest rates rise, borrowers with ARMs face the possibility of significant increases in their monthly mortgage payments. This volatility can make budgeting challenging for borrowers, as the expected payments may substantially increase when the adjustment occurs. Unlike fixed-rate mortgages, where the payment amount remains constant throughout the life of the loan, ARMs can become financially burdensome as rates change, making this risk particularly concerning for homeowners.

The other considerations, such as fixed monthly payments, higher initial down payments, and credit score requirements, do not directly relate to the inherent risk of ARMs. Fixed monthly payments are characteristic of fixed-rate mortgages, not ARMs. While down payment amounts and credit score requirements are essential factors in obtaining a mortgage, they do not address the unique risks associated with the variability of payment amounts in ARMs.