Mortgage hunters of the world, it's time to ARM yourselves.

Bond traders are scouring for inflation in every economic press release from here to Tokyo, and that means 30-year fixed-rate mortgages below 6.5, 7 or even 7.5 percent are rapidly becoming a thing of the past.

As a result, adjustable-rate mortgages now make sense for many consumers. But because many borrowers haven't had to study or even think about ARMs in a long while, experts say it's time for a refresher course on how they work.

"Adjustable-rate loans have become much more viable in the last six weeks as fixed interest rates have gone up, and we are seeing a substantially larger number of our loans going to the adjustable rate side," says Brad Blackwell, senior vice president for retail mortgage banking at Washington Mutual Inc. The nation's largest thrift, based in Seattle, specializes in adjustable rate lending.

"Qualifying rates, payments and actual costs to the borrower over the long term are lower today with the adjustable-rate loan."

Much like the tide, the popularity of adjustable-rate mortgages rises and falls with forces beyond its control.

ARMs looking more attractive
When it looks like inflation might become a problem in the economy, mortgage rates start heading higher. Each uptick makes it a little tougher for potential buyers to afford homes. That, in turn, makes ARMs look more popular, because they generally allow people to pay less early on in the mortgage term on the condition they'll agree to pay more later if rates rise.

During the past several months, the process played out like clockwork. The Bankrate.com national average for 30-year fixed-rate loans climbed from 6.46 percent last October to 7.66 percent in early July. The monthly principal and interest payments on a $150,000 mortgage rose to roughly $1,065 from $944. And ARM applications, as a percentage of those submitted overall, climbed to 20.4 percent from 5.9 percent, according to the Mortgage Bankers Association of America.

"When there's a creep up in interest rates, ARMs definitely become more popular," says Eric Burgoon, senior vice president at Old Kent Financial Corp. in Grand Rapids, Mich. "It's been growing probably for the last, I'd say, six to eight weeks ... and we're moving up closer to 15 (percent), 20 percent ARMs"

A wider array of choices
Borrowers can find more types of adjustable-rate mortgages these days, depending on their needs and tolerance for risk.

For the most market-savvy, there are short-term ARMs with an initial fixed period of as little as six months to one year. Customers might choose the product because they're willing to stomach frequent payment adjustments in order to free up more money to invest in the stock market or otherwise earn a higher rate of return.

Longer-term ARMs that start off with fixed rates for the first couple of years and adjust annually thereafter offer a bit more stability. A 3/1 ARM, for example, stays fixed for three years, then can be adjusted once a year. There are also 5/1, 7/1 and 10/1 ARMs available, so borrowers can match their fixed period to the number of years they expect to live in their homes. That makes them a good deal for people who want to save a bit on the interest rate and who have well-defined housing goals.

"[Consumers are] doing a much better job of matching their borrowing needs with their expected tenure that they're going to be in their home," says Larry Hamilton, chief executive officer of Birmingham, Ala.-based SouthTrust Corp.'s mortgage division.

"We don't have a consumer out there that absolutely has to have a 30-year mortgage to sleep at night, and since most 30-year mortgages prepay in seven or eight years, you can make the case: 'Why does anybody ever need a 30-year fixed rate?' "

Still, some borrowers choose ARMs that closely resemble fixed mortgages. These "two-step" products feature fixed payments for many months, followed by a one-time adjustment to current market rates.

A 7/23 would offer seven years of stability, one change and then 23 more years of fixed payments, for example. These mortgages offer many of the same benefits of other long-term ARMs, but they typically carry a bit more risk. That's because lenders can increase the rate much more at the time of the one adjustment than they are allowed to each year with regular long-term ARMs

Avoiding the adjustment
"The most common question for adjustables, especially longer-term adjustables, is 'What is the likelihood that I'm going to endure an adjustment during the time that I'll be there?' " says Brian Israel, vice president of Chicago-based Harris Trust and Savings Bank's residential mortgage division. "Probably 90-plus percent of the people who take seven- or 10-year programs do not ever see an adjustment."

Consumers may also enjoy more flexibility with ARM lenders than they do with fixed-rate mortgage originators. Because many ARMs are kept on the company books rather than sold into the secondary market in the manner of most 30-year loans, they often don't have to meet strict Fannie Mae and Freddie Mac guidelines.

"There can be substantially more financial flexibility for a borrower who takes an ARM," says Blackwell of Washington Mutual. The company offers an "Option ARM," for example, which lets people choose from a menu of payment options. One borrower might temporarily make interest-only payments to free up some cash, while another could follow the accelerated payment schedule provided in order to retire the 30-year mortgage in 15 years.

While the flexibility of ARMs makes them an attractive financing option, borrowers still need to make sure they know what they're getting. Loan holders could easily see their payments skyrocket if 1980s-like double-digit mortgage rates return in the new millennium, and that could plunge unprepared consumers into foreclosure.

"It's like with any investment," says Old Kent's Burgoon. "You're generally speaking about not knowing which way interest rates are going to go, just like not knowing where the stock market is going.

"If your risk tolerance is high enough, you usually come out ahead on an ARM, but that's a big 'IF'."