Final answer:
When homeowners expect interest rates to rise, they prefer fixed rate loans to secure the current interest rates and avoid future increases. Conversely, if inflation falls, homeowners with an adjustable-rate mortgage would likely benefit from reduced interest rates, leading to lower monthly payments.
Step-by-step explanation:
When homeowners expect that interest rates will rise, they generally prefer fixed rate loans. A fixed-rate mortgage has a consistent interest rate for the entire term of the loan, providing stability and protection against future interest rate increases.
In contrast, an adjustable-rate mortgage (ARM) has an interest rate that can change over time, usually in relation to an index, and potentially could rise in accordance with market rates.
If investors or homeowners anticipate an upward trend in interest rates, they typically opt for a fixed-rate mortgage to lock in the current rates and avoid the risk of their monthly payments increasing.
If inflation were to fall unexpectedly by 3%, a homeowner with an adjustable-rate mortgage would likely experience a decrease in their interest rate, since ARMs typically adjust based on market conditions, which includes changes in inflation rates. This would result in lower monthly payments, benefitting the homeowner.