Final answer:
To keep monthly payments low and predictable, the best option is a 30-year fixed-rate mortgage because it offers stability in payments regardless of market conditions. An adjustable-rate mortgage, while potentially starting with lower rates, can fluctuate and result in less predictability in monthly payments.
Step-by-step explanation:
If you wish to keep your monthly payments as low and predictable as you can, you should use a 30-year fixed-rate mortgage. A fixed-rate mortgage keeps the interest rate steady over the life of the loan, ensuring that your mortgage payments remain constant, provided other factors such as property taxes or homeowner's insurance do not change. In comparison, an adjustable-rate mortgage (ARM) allows the interest rate to change with market conditions, which could result in higher or lower payments over time.
In the context of an ARM, if inflation falls unexpectedly by 3%, it would likely lead to a decrease in the interest rate charged on the loan. This adjustment helps maintain the real interest rate, which is the nominal rate minus inflation. However, this also means that the predictability of your payments is compromised since they can fluctuate according to changes in inflation and market interest rates.
Conversely, with a fixed-rate mortgage, you are insulated from such fluctuations, which may make it a more suitable option if predictability is your primary concern. But keep in mind that the trade-off for stability in a fixed-rate mortgage might be higher initial interest rates compared to ARMs.