Final answer:
An amortized loan is one that is structured for the principal to be paid in full during the term of the loan through regular monthly payments. The benefit to borrowers or lenders depends on the interest rates compared to inflation. For an adjustable-rate mortgage, if inflation decreases, the homeowner may benefit from reduced interest payments.
Step-by-step explanation:
A mortgage loan payable in monthly installments that are sufficient to pay the principal in full during the term of the loan is known as an amortized loan. This type of loan is structured so that the borrower pays off the loan amount with interest through regular payments over a set period. The payments are calculated so that by the end of the loan term, the entire debt, including the interest, is paid off.
When considering when it might be preferable to be borrowing from a bank or lending as a bank, it largely depends on the interest rates and rate of inflation. If the interest rate is lower than the rate of inflation, it generally benefits the borrower because the real value of the payments decreases over time. Conversely, when interest rates are high compared to inflation, it benefits the lender since they receive payments with a higher real value.
The Impact of Inflation on Mortgages
If inflation falls by 3%, a homeowner with an adjustable-rate mortgage might see their interest rates decrease, leading to lower monthly payments. This change occurs because adjustable-rate mortgages are typically influenced by market interest rates which are often correlated with inflation. A fixed-rate mortgage remains the same regardless of changes in inflation.