Final answer:
A biweekly mortgage will result in the most rapid reduction of the principal balance as it involves making 26 half-payments per year, which results in one extra full payment annually. In contrast, adjustable-rate and fixed-rate mortgages depend on the terms of interest and inflation, which do not directly affect the pace of principal reduction. Interest-only mortgages delay the payment of principal. option (B)
Step-by-step explanation:
The type of loan that will result in the largest reduction of the principal balance most quickly is the biweekly mortgage. Unlike the other loan types listed, a biweekly mortgage entails making payments every two weeks instead of monthly. This results in 26 half-payments, or 13 full payments, each year, ultimately paying off the principal more rapidly and reducing the amount of interest paid over the life of the loan.
An interest-only mortgage allows the borrower to pay only the interest on the mortgage for a set period of time, which means that no principal is paid off during that initial term. A fixed-rate mortgage does not change the interest rate over the life of the loan. An adjustable-rate mortgage (ARM) has an interest rate that varies with market rates and conditions, such as inflation rates.
If inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage might see their interest rate go down as ARM rates often fluctuate with general market trends including inflation. This could potentially lower monthly payments, depending on the specific terms of the ARM. However, the principal balance is unaffected by changes in inflation or interest rates and is only reduced by payments directly applied to the principal.