Easing the squeeze that's coming on adjustable-rate mortgages

There's a whole new group or constituency of voters that may want to start pressing politicians in Washington to do something about rising interest rates. These are the millions of homeowners who have adjustable-rate mortgages (ARMs) and are facing an adjustment - an upward one - this year or next because of higher mortgage rates. Most people, for instance, who have home loans permitting a 2 percent annual increase in their mortgage can probably expect the lender to tack on that entire 2 percent if the adjustment is due this year. And after absorbing this year's rise, they should expect the possibility of another one next year.

In this environment, where buyers and lenders are both trying to avoid being squeezed by escalating interest rates, first-time home buyers are probably wondering what they can do to ease the squeeze, or at least make it less of a shock. This also probably applies to people selling a house with a fixed-rate mortgage and buying a new one with an ARM.

First, says William Adkinson, spokesman for the National Association of Realtors, people should be aware of everything they're getting into.

''Lenders should be obliged to follow current laws and advise buyers of every ramification of various types of mortgages,'' Mr. Adkinson says. ''And home buyers should be obliged not to go into anything with their eyes closed.''

It is possible to find ARMs where the first adjustment comes as soon as six months, or as far away as five years. The six-month varieties are often low ''come on'' rates that will jump substantially, while rates on the five-year ARMs are usually so close to the rates on 30-year fixed mortgages that the buyer might as well go for the fixed rate.

So the one-year ARM seems to have become the most widely accepted version of this device, with interest rates about two percentage points less than the fixed rate. While fixed-rate mortgages are running at 13.5 to 14 percent, the first-year rate on ARMs is in the 11.25-to-12.5-percent range. Because of rising interest rates generally, both are increasing.

At the same time, a survey by Advance Mortgage Corporation of Dallas has found that many mortgage insurers are trying to make sure homeowners can afford the expected jumps in monthly payments. So they are reducing the payment-to-income ratio needed to qualify for insurance on an ARM from 331/3 percent to 28 percent. This means that buyers who could once qualify for an ARM with about half the income needed for a fixed-rate mortgage now need about 75 percent of the fixed-mortgage buyer's income.

The first thing a prospective home buyer should seek in an ARM, says Alan Crittenden, is something called a ''cap.'' Mr. Crittenden, who publishes a real estate financing newsletter in Novato, Calif., says most ARMs come with a 2 percent cap, meaning the mortgage cannot increase by more than that each year.

You may also want to look for a lifetime cap, which guarantees that the mortgage will never go up more than, say, five or six points. So if you sign up for a 12 percent ARM, you know you will never pay a rate higher than 17 percent. You may have to pay a little higher initial rate for a lifetime cap. Or you may only plan to stay in the home for three or four years; in this case, the lifetime cap may not be so necessary.

Another kind of cap - the ''payment cap'' - should be approached with much more caution. Here, the lender agrees that even if interest rates go up, your monthly payments won't. Well, the rate on your mortgage still goes up, but the additional money you owe will be tacked on to the principal. Also known as ''negative amortization,'' it means it will take longer for you to pay off the mortgage or you won't get as much as you planned out of the house when you sell it.

In looking for the best deal on mortgages, you may see ads in newspapers for rates under 10 percent, perhaps as low as 81/2 percent. This is usually a ''discounted rate.'' Often these are offered by builders or home developers to get people into homes for which they have borrowed heavily to build. The problem is, you will probably be hit with a market rate, perhaps five points higher and several hundred dollars a month more, in six months or a year.

When you do find an ARM you can afford, ''the lender should be able to give you a worst-case scenario of what your payments will be at various interest rates,'' says Kenneth Kerin, vice-president for research at the Realtors' association. If your payments are so much this year at 12 percent, what will they be if the rate goes up to 14 percent next year, or 16 percent the year after that? You should get the lender to write all this down on paper you can keep, to avoid misunderstandings later.

One way to ease the pain of an upward adjustment that comes a year or two after you buy the house, Mr. Kerin says, is to file a new W-4 tax form with your employer. When your payments go up because of a higher rate, he notes, so does the interest deduction on your federal income taxes. By declaring more deductions on the W-4, you increase your take-home pay, part of which can be used to pay that higher interest. You should check with a tax specialist or accountant before doing this, however, to see if this is to your advantage and, if it is, to help figure out the best formula.

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