What is generally considered a disadvantage of taking an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) typically has an interest rate that can change over time, which means that monthly payments may fluctuate. This potential for payment increases is a significant disadvantage. Borrowers might start with lower initial payments, which can be appealing, but as the interest rate adjusts—often after an initial fixed period—monthly payments can rise significantly. This can lead to unanticipated financial strain for homeowners if they are not prepared for the possibility of these increases.

In contrast to the other options, which might seem favorable, the intrinsic risk associated with an ARM lies in this variability. While lower initial payments can be attractive, they don’t compensate for the uncertainty and potential financial burden that may arise when rates increase. Similarly, the notion of no closing costs may seem beneficial, but it does not address the underlying risk involved with fluctuating payments. A fixed interest rate provides stability, which is the opposite of what defining an ARM entails.