Final answer:
Over the life of a mortgage, the payment to principal (C) increases while the portion to interest expense decreases. For a homeowner with an adjustable-rate mortgage, a fall in inflation by 3% would likely result in a decrease in the interest rate, consequently reducing the interest expense portion of their mortgage payments. Paying off mortgage debt faster can lead to significant savings on interest.
Step-by-step explanation:
Over the life of a mortgage, the payment to principal increases and the portion to interest expense decreases. This is because most mortgages are structured so that the initial payments are heavily weighted towards paying interest, and as the principal balance decreases over time, the proportion of the payment that goes towards principal increases while the portion that goes towards interest decreases.
If inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage (ARM) may see a decrease in their interest rate, assuming that the market interest rates decrease as well. The interest rate on an ARM is typically tied to an index that reflects the general direction of interest rates in the economy. With lower inflation, interest rates often drop, which would reduce the interest expense portion of future mortgage payments for the homeowner.
It is also beneficial to pay off mortgage debt faster to save money on interest. As the interest can add a significant amount to the overall cost of a mortgage over 30 years, making additional payments towards the principal can lead to substantial savings on interest payments.