Final answer:
The incorrect statement among the options is that the amount of the payment applied to interest in a fixed-rate mortgage increases over time. In truth, as the principal is paid down, the interest portion decreases while the principal portion of the payment increases. The correct option is C.
Step-by-step explanation:
The statement about a fixed-rate or level payment mortgage loan that is NOT accurate is: c. the amount of each payment that is applied to paying interest increases over the life of the loan. In fact, over the life of a fixed-rate mortgage, the portion of the monthly payment applied to interest actually decreases while the portion applied to the principal increases. This is due to the way that amortization schedules work for these types of loans.
With a fixed-rate mortgage, borrowers enjoy a consistent monthly payment over the terms of their loan, which could be 15, 30, or another number of years. Each payment is split between repaying the principal of the loan and the interest charged on the outstanding balance.
As time goes on and the principal decreases due to consistent monthly payments, the interest calculated on this reducing balance also decreases, hence a larger portion of the monthly payment goes towards reducing the principal.
In the scenario where inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage (ARM) could expect their interest rate, and consequently their monthly payment amount, to decrease. This happens because ARMs have interest rates that vary with the market rates, which are influenced by inflation among other factors.