Final answer:
Art's 7/1 ARM means the fixed interest rate will be applied for 7 years, after which it will adjust annually. An unexpected 3% drop in inflation would likely result in a decrease in the interest rate of an adjustable-rate mortgage during the adjustment period.
Step-by-step explanation:
If Art has a 7/1 ARM, the fixed interest rate will be applied to his loan for 7 years. An ARM, or adjustable-rate mortgage, has an initial fixed-rate period followed by a period where the rate adjusts annually. After the initial fixed-rate period, the interest rate will adjust based on market conditions. In Art's case, with a 7/1 ARM, after the 7-year period of fixed interest rate, his mortgage rate will change annually. If market interest rates, which can be influenced by inflation rates, fall unexpectedly, those with an adjustable-rate mortgage might experience a decrease in their interest rates which corresponds to the fall in inflation.
Considering an unexpected drop in inflation by 3%, a homeowner with an adjustable-rate mortgage would likely see their interest rate decline. This is because ARM rates typically move with broader market interest rates, which are influenced by inflation. Hence, the homeowner could expect lower monthly mortgage payments during the adjustment period, assuming the rate adjusts downward in response to the falling inflation.