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

The primary risk associated with adjustable-rate mortgages (ARMs) is the potential for increased monthly payments when interest rates rise. ARMs typically start with a lower interest rate compared to fixed-rate mortgages. However, the interest rate on an ARM is adjusted periodically based on market conditions, which means that as market interest rates increase, the payment amount can also increase significantly—possibly beyond what the borrower initially anticipated or can afford.

This variability can lead to payment shock when the rate adjustments occur, causing borrowers to face higher monthly payments that may strain their finances. In contrast to fixed-rate mortgages, which maintain consistent monthly payments regardless of market conditions, ARMs introduce uncertainty and potential financial pressure for the borrower, making it essential for borrowers to understand the terms and risks involved with such loans.

Other choices presented do not accurately reflect the nature of ARMs; they suggest fixed payments or no risks at all, which misrepresents the adjustable nature of these mortgages. Therefore, the answer emphasizes the critical awareness of the fluctuating payments tied to interest rate changes, a fundamental characteristic and risk of adjustable-rate mortgages.