The Klars Save a Bundle

Through smart shopping for their one-year, adjustable-rate mortgage, Neil and Eileen Klar located an ARM with a start rate of 4.25 percent—well below the then-average initial ARM rate of 5.71 percent. During their first year, the Klars made payments on their $450,000 mortgage of around $2,200 a month. The fixed-rate mortgage they were offered at the time carried an interest rate of 8.875 percent and would have required payments of $3,580 a month—which meant a first-year out-of-pocket savings of $16,560 for the ARM.

Even if the Klars had been hit with maximum annual increases in their ARM payments due to rising interest rates, it would have taken nine years for their total ARM payments to catch up with the fixed-rate payment they were alternatively offered. By that time, they may have moved on to another property. Or, with inflation then running at 2.5 percent a year, the chances looked good that fixed rates would fall substantially. The Klars would then refinance. Either way, they were nearly certain to come out ahead with their ARM.

As it turned out, the Klars figured right. When they refinanced several years later, their full savings, relative to their fixed-rate alternative, totaled $58,371.

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