What is the primary risk of allowing an interest rate to float?

The primary risk of allowing an interest rate to float is the risk of rising interest rates. When a loan has a floating or adjustable interest rate, the rate is tied to a benchmark that can change over time, often increasing based on market conditions. If interest rates rise, the borrower will face higher monthly payments and increased overall interest costs over the life of the loan. This variability in payments can lead to financial strain and potentially make it difficult for borrowers to manage their budgets effectively, particularly if their financial circumstances do not allow for an increase in monthly mortgage payments.

When considering alternatives, options like a potential decrease in loan amount, limited options for refinancing, or higher upfront costs may arise in certain scenarios, but they do not capture the primary concern associated with floating rates. The prevailing risk remains centered on the fluctuating nature of interest rates leading to increased financial obligations for the borrower.