Final answer:
The adjustable-rate mortgage (ARM) is most likely to have the lowest initial interest rate and, if inflation falls unexpectedly by 3%, a homeowner with an ARM would likely experience a reduction in their interest rate.
Step-by-step explanation:
Among the given options, the adjustable-rate mortgage (ARM) is most likely to have the lowest initial interest rate. However, because ARMs are influenced by market interest rates, they can vary over the life of the mortgage. Fixed-rate mortgages maintain the same interest rate throughout the loan's duration. Interest-only mortgages may start with lower payments, but the interest rate is not necessarily lower. Balloon mortgages often have lower interest rates at the beginning, but require a large payment at the end of the term.
If inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage would likely experience a decrease in their interest rate. This is because ARMs typically adjust based on market rates, which are influenced by inflation. A lower inflation rate can lead to lower interest rates, thus reducing the monthly payments for those with ARMs. This adjustment is a result of the built-in inflation adjustment which means when the inflation rate decreases, the interest rate charged on the loan may decrease as well.