Interest Rate Risk

See: Adjustable-Rate Mortgage (ARM).

Interest rate risks come in many flavors, but the most unpopular form lives inside of home mortgages where, for decades, home owners opt for adjustable rates, rather than fixed ones, believing that interest rates will go down, and that their monthly mortgage bill will also drop. In the last two decades, this phenomenon has, in fact, been what actually played out. Rates that hovered at 6% in the 1990s dropped to some 2-3% by 2020.

So those who rolled the dice on lower rates...won. But if things go the other way, i.e. we get rampant inflation and suddenly governments around the world want to cool global economies...then the world can look suddenly very different to a new homeowner, paying $2,749 a month for a mortgage, only to have it become 4 grand a year later.

That's interest rate risk with teeth. The risk is that you can't pay the bills under the higher rates, and you end up living in your minivan...down by the river.