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NEVER BEEN A BETTER TIME FOR ARMS

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The case for getting an adjustable rate mortgage is fairly strong right now.

One-year ARMs are being offered as low as 3.785 percent in some cities and at a national average of 4.3 percent if you're willing to pay upfront interest in the form of a point or two.Either way, the ARMs are more than 2 percentage points below 30-year fixed-rate mortgages, which have been hovering around the 7 percent mark in recent weeks.

After a scare about rising interest rates late in 1993, the consensus of economists now seems to be that inflation is so low - 2.7 percent last year - that there's no reason for rates to rise in coming months.

A homebuyer getting an ARM is interested in the longer term outlook, of course, and knows there are no guarantees. But recent economic history, from the mid-1980s on, has made winners out of those who chose ARMs. There's no reason at this time to think that won't continue.

The allure of an ARM is its initial low rate and the low mortgage payment that goes with it. For example, on a $120,000 mortgage, the cost of an ARM that started at 3.875 percent would be $564 a month for principal and interest.

By comparison, a 30-year fixed rate mortgage for the same amount at 7.125 percent would result in a monthly payment of $808.

That's a hefty difference - $244 a month, or a little more than $2,900 for the year.

What happens in year two? With most one-year ARMs, the interest rate cannot rise more than 2 percentage points in a year. In this case, that would put you at 5.875 percent with a mortgage payment of $706.

That's still $102 a month below the $808 you'd be paying on the 30-year fixed. So, over the two year period, you'd save a total of $4,152.

After that, the rate you pay will depend on what's happened to inflation. In the past three years, it has been trending down - 3.1 percent in 1991, 2.9 percent in 1992 and 2.7 percent last year. If that trend continues, you'll come out far ahead on an ARM because ARMs fluctuate with short-term interest rates, which in turn are influenced by inflation.

Most ARMs today come with a margin of 2.75 percent. That means that you pay the interest rate of the basic index to which the

ARM is linked, plus 2.75 percent.

If the ARM is linked to the one-year Treasury bill, as many are, the rate now would be about 6.36 percent - 3.61 percent for the Treasury bill, plus a 2.75 percent margin.

Treasury bills have ranged between 3.18 percent and 3.71 percent since July 1992. So, for all that time, anyone with a one-year ARM has been paying rates below 7 percent.

That doesn't mean rates will never go higher. Anyone with an ARM must be prepared to pay the maximum, which usually is 6 percentage points above the starting rate. If you start with an initial rate of 3.875 percent, the maximum would be 9.875 percent.

The nice thing about ARMs, though, is that just as rates rise, they also fall. Homeowners who have had an ARM since the early '80s saw this happen to a spectacular degree.

Also, the new rate on an ARM is calculated each year based on your outstanding mortgage balance, which will be a little lower each time.

Even though interest rates may rise above 7.1 percent - the rate you can get now on a 30-year fixed mortgage - you wouldn't be paying $808 a month as homeowners with the fixed rate are.

Lower interest rates in the early years of an ARM mean you lower your outstanding balance quickly, so that future payments are figured on a lower dollar amount. But each year you also figure the balance on a shorter term, which effectively raises the payment.

Despite that, by the time you reach the 7.1 percent interest rate, your monthly payment is $794, not $808.