Final answer:
The monthly payment under a graduated payment mortgage will initially increase annually by a predetermined rate and then stabilize. Homeowners with adjustable-rate mortgages would see decreased payments if inflation drops by 3%. Borrowers benefit when mortgage interest rates are low relative to inflation, whereas banks benefit when rates are high relative to inflation.
Step-by-step explanation:
Under a graduated payment mortgage (GPM), the monthly payment will increase annually by a predetermined rate in the early years of the loan, and then remain constant for the remainder of the loan period. This is option b, which correctly describes a feature of the graduated payment mortgage.
On the subject of mortgage types, if inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage (ARM) would likely see their interest rate decrease as well. This is because ARMs are typically tied to an index that reflects market interest rates, which tend to fall when inflation decreases. A decrease in the interest rate would lead to lower monthly payments for the homeowner.
In the context of overall mortgage interest rates versus inflation rates, the years in which it would be more advantageous for a borrower to take out a loan would be when the mortgage interest rates are lower relative to the inflation rates. Conversely, it would be better for the bank if the mortgage interest rates were higher relative to inflation rates.