Final answer:
An adjustable-rate mortgage (ARM) adjusts its interest rates based on market conditions, such as changes in inflation. If inflation falls by 3%, homeowners with ARMs would likely see their mortgage interest rates decrease, leading to lower interest expenses.
Step-by-step explanation:
The type of mortgage that provides a predetermined schedule of principal repayments, which assumes prepayment speeds will remain within a certain range, is an adjustable-rate mortgage (ARM). This type of mortgage is characterized by interest rates that fluctuate with market rates. With an ARM, if inflation unexpectedly falls by 3%, a homeowner is likely to experience a decrease in their mortgage interest rate. This happens because ARMs often include inflation adjustments, so the interest rates are aligned with the rate of inflation. In a scenario of decreasing inflation, the financial institution would typically lower the interest rate charged on the loan. Therefore, the homeowner with an ARM would benefit from reduced interest expenses compared to those with a fixed-rate mortgage, where interest rates remain constant throughout the term of the loan.