What is one potential drawback of an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM) can indeed lead to fluctuating payment amounts, which is a significant drawback. Unlike fixed-rate mortgages where the interest rate is set for the entire life of the loan, ARMs start with a lower initial interest rate that can change at specified intervals. After the initial fixed period, the interest rate adjusts based on market conditions, which means that the borrower’s monthly payments can increase or decrease unpredictably. This variability can make budgeting difficult for homeowners, as they may face much larger payments when rates rise, affecting their overall financial stability.

The other options do not accurately describe the characteristics of ARMs. They may not always have higher initial rates compared to fixed-rate loans, as they often attract borrowers with lower introductory rates. ARMs are not exclusively available to first-time homebuyers; they can be an option for any homebuyer. Additionally, ARMs can be refinanced just like conventional loan types, making the refinancing restriction inaccurate. Thus, the potential for fluctuating payment amounts stands out as a key disadvantage of adjustable-rate mortgages.