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ARMS ELBOW WAY INTO THE HOUSING MARKET

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At the end of 1993, when fixed-rate mortgages were being offered at 7.2 percent interest, only about 15 percent of homebuyers chose an adjustable rate mortgage.

But since spring, fixed rates have soared above 8 percent and sometimes close to 9 percent, so now more than one in four buyers is choosing an ARM, according to the most recent weekly survey by the Mortgage Bankers Association.The obvious reason - more people can qualify for a mortgage at 5.8 percent, the going rate for one-year ARMs, than at 8.7 percent, which is what a 30-year fixed-rate mortgage costs these days, according to HSH Associates, a national mortgage information firm.

For example, a $125,000 mortgage would cost $986 a month at 8.7 percent interest compared with $733 at 5.8 percent and $896 at 7.8 percent, the highest rate allowed during the second year of the ARM.

You would need about $48,000 gross annual income to get the $125,000 mortgage at 8.7 percent but only a little more than $35,000 at the 5.8 percent rate.

Some lenders require you to qualify at the highest permissible second-year ARM rate, generally two percentage points above the first-year rate. But others qualify you at the initial rate.

However, many homebuyers are afraid of one-year ARMs because of the current rising rate atmosphere, even though they can't afford a fixed-rate mortgage. Happily, there are a number of options in between.

At many lenders, you can get ARMs that have initial fixed rates for three years, seven and 10 years.

"The 3/1 ARM features a slightly higher start rate than many ARMS that adjust after the first year, but it typically becomes a better deal after the one-year ARM's first adjustment," said Rick Cossano of Countrywide, one of the nation's largest mortgage lenders. "The 7/1 loan combines the initial lower interest of a 15-year loan with the lower monthly payments of a 30-year loan.

"The 10/1 loan offers an initial rate that is below the standard 30-year fixed rate loan. Because Americans typically move every three to five years, many consumers may not experience a rate increase in that mortgage."

At the end of July, Countrywide offered the 3/1 ARM at 6.75 percent interest, the 7/1 ARM at 8.1 percent and the 10/1 ARM at 8.4 percent, each with about two points and based on the one-year Treasury Bill index once it becomes adjustable.

Here's what the monthly payments would be on a $125,000 mortgage at these rates:

3/1 ARM at 6.75 percent - $810.

7/1 ARM at 8.1 percent - $925.

10/1 ARM at 8.4 percent - $952.

Assuming that interest rates don't fall substantially in the next couple of years, you'd pay about the same over two years for the one-year ARM that starts at 5.8 percent and the 3/1 ARM shown above. But in the third year, the 3/1 ARM would come out ahead.

Similarly, the 7/1 ARM and 10/1 ARM would cost more in the first two years but probably less after three or four years unless short-term rates decline.