Final answer:
Fixed payments are not a component of an adjustable rate mortgage. The interest rate on an ARM changes with the market, which can potentially lead to lower payments if inflation falls, as experienced when inflation unexpectedly drops by 3%. The correct option is C.
Step-by-step explanation:
The key components of an adjustable rate mortgage (ARM) do not include fixed payments. The other components listed, such as Index Identification, a lower initial rate, and adjustment intervals, are typical features of an ARM.
Unlike a fixed-rate mortgage, which has the same interest rate for the life of the loan, an ARM's interest rate changes with market interest rates over the life of the mortgage.
Therefore, if inflation falls unexpectedly, a homeowner with an adjustable-rate mortgage might experience a reduction in their variable interest rates, leading to potentially lower payments, as ARMs often have inflation adjustments built into their rates.
If inflation falls by 3%, the interest rate on an ARM may decrease as well, since ARMs generally follow trends in the market interest rates and inflation.
As a result, the homeowner may benefit from lower monthly payments. However, this depends on the specific terms of their ARM, such as the index it is tied to and any interest rate floors or caps that might be in place.