Final answer:
An adjustable rate mortgage (ARM) can be risky because the interest rate can increase over time, making monthly payments unpredictable. Borrowers should weigh the potential risks and their own financial situation before choosing an ARM.
Step-by-step explanation:
An adjustable rate mortgage (ARM) is not necessarily a bad idea, but it does come with certain risks that borrowers should consider.
One of the main drawbacks of an ARM is that the interest rate can increase over time, which means that your monthly mortgage payment could also increase.
This can make it difficult to budget and plan for the future. Another risk is that if interest rates rise significantly, your mortgage payment could become unaffordable.
For example, let's say you have a 5/1 ARM, which means that the interest rate is fixed for the first five years and then adjusts annually.
If you start with a low introductory rate of 3%, but interest rates rise to 6% after the fifth year, your monthly mortgage payment could increase by a significant amount.
Overall, it's important to carefully consider the potential risks and your own financial situation before deciding whether an ARM is the right option for you.
If you prefer more stability and predictability, a fixed-rate mortgage might be a better choice.