Final answer:
Consumers choose adjustable-rate mortgages to take advantage of lower initial interest rates compared to fixed-rate loans. They accept the risk of interest rate fluctuations for the potential short-term savings. However, this means future payments can vary with changes in interest rates.
Step-by-step explanation:
The consumer rationale behind an adjustable-rate mortgage (ARM) is primarily the potential to benefit from lower initial interest rates as compared to fixed-rate loans. With an ARM, the interest rate adjusts in accordance with market inflation rates, which means that when inflation is low, the interest rates can be lower than fixed rates. This is possible because lenders are protected against the risk of higher inflation reducing the real value of loan payments. Hence, the risk premium on interest rates for ARMs can be lower. However, this can also lead to increased payments if interest rates rise.
In essence, consumers opt for ARMs to save money in the short term with the understanding that their rates (and potentially their monthly payments) may change over time. The initial savings on interest can be considerable, which is the primary attraction of ARMs for many homebuyers.