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what is interest rate risk and what does this have to do with adjustable rate mortgages?

what is interest rate risk and what does this have to do with adjustable rate mortgages?

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Interest rate risk- It is the risk related to fluctuations in interest rates. Interest rates go up and down as per the monetary policy, inflation rate and economic conditions of country. Interest rates are unpredictable.

Adjustable Rate Mortgage- It is the home loan with interest rate that can change period to period. This can go up or down and the monthly payment of mortgage can go up or down.

Impact of interest rate risk on Adjustable Rate Mortgage:

When interest rate increases, amount of Adjustable Rate Mortgage also increases. There is fixed period for Adjustable Rate Mortgage, after that period ends, interest rate on Adjustable Rate Mortgage goes up. Interest rate remain fixed for the initial period of Adjustable Rate Mortgage after that change in market interest rate affect the interest rate of Adjustable Rate Mortgage.

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