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

The primary risk associated with adjustable-rate mortgages (ARMs) is interest rate risk leading to potentially higher payments. ARMs have interest rates that can fluctuate over time based on market conditions or specific indices. This means that after an initial fixed-rate period, borrowers may find their payments increase significantly as the interest rate adjusts.

This variability in payments can create financial strain for borrowers, especially if they are not prepared for potential increases. For example, if rates rise sharply, monthly payment amounts can escalate greatly, leading potentially to difficulties in meeting the new higher payments. Understanding this risk is crucial for borrowers when deciding whether to choose an ARM over a fixed-rate mortgage.

Other types of risks mentioned are important as well, but they are not the primary concern with ARMs. The risk of foreclosure pertains to a borrower's inability to pay their mortgage, which can happen with any type of loan. The risk of not qualifying for a loan relates to the borrower’s creditworthiness and lending criteria, which is separate from the design of the ARM itself. Property depreciation can affect any real estate loan but is not specific to ARMs; therefore, it does not directly relate to the inherent function of adjustable-rate mortgages.