Consider a 7/1 ARM loan, starting at 5 percent with potential up-or-down yearly increments of 1 percent in the rate. Why is such an ARM loan potentially economically dangerous?

a. Actually, many people have financed their house with an ARM, and such loans are not considered potentially economically dangerous.

b. The loan interest rate can increase without limit over the life of the loan.

c. The loan interest rate for the example mentioned can start at 5 percent and increase to as much as 12 percent after 7 years, effectively doubling (+/ -) the monthly payment.

d. The economic risk of an ARM loan is neutralized, because it is just as likely that the interest rate for the example mentioned could go down each year by the maximum amount.