Final answer:
A homeowner with an adjustable-rate mortgage might benefit from decreased interest payments if unexpected inflation falls by 3%, as ARMs are tied to market interest rates which are influenced by inflation. Fixed-rate mortgage payments would remain unchanged. The rate of adjustment for ARMs would determine how quickly the homeowner feels the effect of deflation.
Step-by-step explanation:
If unexpected inflation falls by 3%, a homeowner with an adjustable-rate mortgage (ARM) would likely experience a decrease in their mortgage interest payments. An ARM's interest rate is tied to market interest rates, which are influenced by inflation. As inflation rates decrease, market interest rates usually follow, potentially reducing the interest rate applied to an ARM.
Conversely, fixed-rate mortgage holders would not see a change in their interest payments as their rate is locked in for the duration of the loan. ARMs include built-in inflation adjustments to adapt to changes in the market, which generally provides the borrower with an initial lower interest rate compared to fixed-rate mortgages.
However, if the fall in inflation was not anticipated, some homeowners with ARMs may face challenges if their payments were based on higher interest rates. The interest rate reduction could alleviate this burden, but it would depend on the specific terms of the ARM and how quickly the adjustable interest adapts to the falling inflation.