Final answer:
The question pertains to mortgage loans and the implications of inflation on adjustable-rate mortgages. A 3% drop in inflation would presumably result in a decreased interest rate for an adjustable-rate mortgage, leading to lower monthly payments for the homeowner.
Step-by-step explanation:
The subject of the question revolves around the concepts of mortgage loans, interest rates, and the effects of inflation. Specifically, it outlines the difference between a fixed-rate mortgage, which maintains the same interest rate throughout the loan term, and an adjustable-rate mortgage (ARM), which fluctuates with market interest rates. The question explores the scenario where inflation drops unexpectedly by 3%, and seeks to understand the likely consequences for a homeowner with an adjustable-rate mortgage.
With a sudden 3% drop in inflation, it is typical for interest rates to decrease accordingly. Consequently, a homeowner with an ARM would likely benefit from a decrease in their mortgage interest rate, which is designed to track market rates including the effects of inflation. This interest rate reduction would lead to lower monthly mortgage payments, thus offering financial relief to the borrower.