Final answer:
Sarah is applying a Variable Interest Rate to her $100,000 loan, which allows for fluctuating interest rates and additional repayments.
Step-by-step explanation:
Sarah has chosen a loan with a fluctuating interest rate and the flexibility to make additional repayments over the life of the loan. The type of interest rate Sarah is applying to her loan is a Variable Interest Rate.
A fixed-rate mortgage maintains the same interest rate throughout the duration of the loan, while a variable interest rate can change based on market conditions. If inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage might see a decrease in their interest rate, as such mortgages often have interest rates that adjust with market conditions, including inflation.
In comparison, prime interest rate is a benchmark interest rate used by banks to set rates on various forms of loans, and compound interest rate refers to the calculation of interest on the initial principal and also on the accumulated interest from previous periods.