Question

A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage.
5a. How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?
5b. If inflation falls unexpectedly by 3%, what would likely happen to the situation for a homeowner with an adjustable-rate mortgage?

Answer 1

Solution:

5a. Mortgage:It is a loan from the bank or financial institution that helps the needy buy home.

An increase in inflation will decrease the adjustable rate mortgage the reason is the government in order to handle the situation will lead people to invest in a long time investments hence people will be attracted to these low interest rates and more and more people will be attracted to take mortgage. Hence people will invest in long term rather than short term in order to control the effect of inflation.

5b. If the inflation falls unexpectedly by 3% the interest rate will increase hence this will lead to the situation that people who taken mortgage for a fixed amount every month they have to pay it for a longer time because of this situation also  for the people who have taken mortgage for a fixed time they have to pay more every month.

please give a thumbs up if you get the answer to the question thankyou!!.