Final answer:
In analyzing mortgage loans, it's generally better for borrowers when inflation is higher than the mortgage interest rates, while it's better for lenders when interest rates exceed inflation. For those with an adjustable-rate mortgage, a decrease in inflation by 3% could lower their mortgage interest rates, resulting in reduced interest payments.
Step-by-step explanation:
When evaluating the best years for borrowers versus lenders in relation to mortgage loans, one must consider the relationship between mortgage interest rates and the rate of inflation. If the rate of inflation exceeds the mortgage interest rate, it's typically better for the borrower. This is because real interest on the loan is effectively less than the nominal rate as the value of the borrowed money depreciates due to inflation. Conversely, in years where the mortgage interest rate is higher than inflation, lenders benefit as the value of the interest payments they receive retains more purchasing power.
For a person with an adjustable-rate mortgage (ARM), if inflation falls unexpectedly by 3%, it is likely that the market interest rates would decrease too, leading to a potential drop in the interest rate applied to their mortgage. This would reduce the amount of interest the homeowner would need to pay on their loan, providing them with financial benefit in the short run.