Final answer:
A fixed-rate mortgage maintains a fixed interest rate throughout the loan's life, unlike an adjustable-rate mortgage (ARM), which varies with market interest rates. Monthly payments remain constant over time for a fixed-rate mortgage. If inflation falls, an ARM could see decreased interest rates resulting in lower monthly payments.
Step-by-step explanation:
Which of the following is true of conventional fixed-rate mortgages? The correct answer is that it has a fixed interest rate during the life of the mortgage. Unlike an adjustable-rate mortgage (ARM), which has an interest rate that changes with market interest rates and potentially with inflation, a fixed-rate mortgage maintains the same interest rate throughout the entire loan term. Therefore, option (c) is incorrect because monthly payments on a conventional fixed-rate mortgage remain consistent over time and do not increase. Option (a) describes characteristics of an ARM, not a fixed-rate mortgage, and option (d) is typical of a balloon mortgage, where lower payments are made followed by a large final payment.
If inflation falls by 3%, and you have an ARM, your loan's interest rate might decrease, leading to lower monthly payments. This scenario results from ARMs having built-in inflation adjustments, protecting lenders from the risk that higher inflation will reduce the real value of repayments but also providing a benefit to borrowers during times of lower inflation.