Final answer:
The correct answer is option 1) prepaid.
Step-by-step explanation:
Private Mortgage Insurance, or PMI, is typically required when a homebuyer makes a down payment of less than 20% of the home's purchase price. PMI protects the lender in case the borrower is unable to make their mortgage payments and goes into default. It is not prepaid, nor is it paid in arrears. Instead, PMI is usually paid as part of the monthly mortgage payment. Additionally, PMI is not paid to the Farmers Home Administration (FmHA); it is paid to a private insurance company. PMI can also be prorated, depending on the terms set by the lender or the insurance provider.
As for when it is better to borrow or lend money for a mortgage, this depends on the interest rates and inflation rates during the years in question. Generally, it would be better for borrowers when the interest rate is low compared to the rate of inflation because it reduces the real cost of borrowing.
Conversely, it's usually better for banks to lend when the interest rate is high, making lending more profitable. To determine the specific years when it was more advantageous for either party, one would need to analyze the provided list of mortgage interest rates and inflation rates.