(MONEY Magazine) – The faithful fixed-rate, no-frills, 30-year mortgage is back in style. Now that its interest rate has subsided to single digits in many areas, why should househunters want any other kind of loan? In short, they shouldn't. Yet banks and mortgage companies are manufacturing a multitude of choices, one or another of which might match up better with some people's needs. The loan that has lost the most ground in recent months is the adjustable- rate mortgage (ARM), whose interest rate changes at regular intervals in step with a designated interest index. Only 25% of home loans being written these days are ARMs, compared with 65% last October. One reason is the narrowing of the rate gap between the low first-year interest cost of a 30- year ARM and today's fixed-rate mortgage. While more than three percentage points separated the two rates six months ago, the spread is now less than 2 1/2 points -- typically 7.6% vs. 10%. And 2 1/2 points don't look like much of an edge in any ARM with a yearly rate adjustment. The first fact about this type of loan is that the rate is marked up two points on its first anniversary unless rates in general fall. Even so, an ARM could cost you less if you don't expect to own the house more than about five years. Or you might want to consider the trendy new convertible mortgages, designed for folks who worry about marrying themselves to a mortgage contract for better or worse, interest-wise. Convertibles give you a chance in the early years to switch from a variable to a fixed rate or from the original fixed rate to a lower rate if one comes along. Still another alternative is an accelerated, biweekly payment plan, which slashes your interest cost. Crunching all the variables into a single number that tells you which mortgage deal is cheapest is a job for a computer (see overleaf). But first you need a rundown on the low-tech facts about the new mortgages, starting with the currently popular fixed-rate loans. The biweekly mortgage. You pay half the monthly payment on a fixed-rate mortgage every two weeks. That's 26 payments a year, or 13 monthly payments, so you're really shortening the term of the loan and reducing the interest cost a bit each month. The result on a $100,000, 30-year mortgage at 10%, for example, is that you can burn your mortgage in just under 21 years and save $78,359 in interest, before taxes. As an additional sweetener, some banks charge lower rates for biweeklies. At Mechanic & Farmers Savings Bank in Bridgeport, Conn., where more than 75% of new mortgages are biweeklies, the discount is a quarter of a percentage point (recently 9.75% instead of 10%). These plans, according to Walter Henderson, a senior vice president, are favored by two-earner families who are trading up. Banks try to make sure of getting their payments on time by almost always tying biweeklies to an automatic payment plan. You open a money-market account, from which the bank extracts the payments. If you have insufficient funds on deposit, however, you are slapped with an overdraft charge that may range from $9 to $22. The rate-reduction-option mortgage. You get one chance, usually between the second and the fifth year, to convert a fixed-rate loan to a lower rate if rates in the mortgage market drop two full points from their level when you took out the loan. The loans appeal to borrowers who want to avoid variable rates. Without apologies to Ernest Hemingway, Foster Mortgage Corp., a nationwide division of Security Capital Group in New York City, calls its plan Farewell to ARMs. If rates drop from Foster's current 10% to 8%, borrowers may convert any time during the second, third or fourth year. There are two catches: a conversion fee equal to 0.25% of the outstanding balance and an initial rate that is a quarter of a point higher than Foster's nonconvertible loan rate. Thus far Foster is finding few takers, and other lenders are waiting for the right moment to offer rate-reduction options. Peter Olivieri, a Foster assistant vice president, says prospective home buyers are unwilling to pay the quarter-point premium because they doubt that fixed rates will drop from 10% to 8% in the next four years. But that attitude may change if long- term Treasury rates rise to 11%, as some economists expect them to later this year (see page 87). Convertible ARMs. Conversion is the star feature in ARMs this spring. Like most ARMs, the convertibles usually have a 30-year term and permit rate adjustments once a year. As with rate-reduction mortgages, the conversion privilege is short-lived and usually costs $250 or so to invoke. The new fixed rate runs about half a point higher than the national average 30-year rate. Lenders are writing a symphony of variations on this conversion theme. Greater Metro Financial of Wayne, N.J., for example, has some 30 versions, among them a yearly adjustable plan that lets you convert on the third, fourth or fifth anniversary of the loan for a fee of $100. First Union Mortgage Corp. of Charlotte, N.C. allows conversion at the end of any month from the second year through the fifth year. The more flexible the schedule the more advantageous it is to the borrower. The initial interest rate on a convertible ARM may vary according to the terms and so may up-front charges such as points -- each point equaling 1% of the amount borrowed. Foster Mortgage, for example, offers a convertible ARM with a yearly rate adjustment and the right to convert when your 36th, 48th or 60th payment is due. This loan starts out with a 7.25% interest rate plus 2 1/ 2 points and rises two points in year two. Foster also has a three-in-one ARM -- annual rate adjustments start after three years -- with a conversion right within 15 days after you get notice of your first or second periodic adjustment. The initial rate is 8.875% plus two points. Then there is an ARM with a rate adjustment every three years and a conversion right with your 36th or 72nd payment. The initial rate is 9% plus 2 1/2 points. Whatever type of mortgage you choose, the amount you can borrow depends on your income and other debts. It all boils down to the monthly carrying cost as a percentage of your income. To learn how big a mortgage you can afford, fill out the worksheet on page 118. Personal variables such as your tax bracket, closing costs and points, and how long you expect to stay in the house should also influence your choice of a mortgage. This is where computer assistance can pinpoint the right deal. But whether or not you are prepared to apply high-level math to the problem, check out all of the following terms and conditions: -- Good-faith estimate. Lenders must give you this statement of all mortgage origination costs, including application-processing fees ($200 to $400), appraisal fees and points, within three days after you sign an application. But don't wait that long. Ask for the estimate before you apply. -- Late-payment charges. Most lenders penalize borrowers for missing a monthly payment deadline. In states where there is a statutory grace period, no penalty can be levied unless you are delinquent for one or two weeks. The charge varies from 2% to 10% of the unpaid amount. -- Prepayment penalty. Lenders sometimes charge extra if you pay off part of your loan ahead of schedule. This charge usually equals 2% of the amount prepaid. Avoid mortgages with prepayment clauses that extend past the third year. -- Assumption. A mortgage with an attractively low rate can help you when you put your house on the market, but only if your loan contract permits acceptable buyers to take over, or assume, the debt. Most fixed-rate mortgages these days are not assumable, but ARMs usually are. If your lender reserves the right to raise the interest rate, the right of assumption loses some value. -- ARMs disclosure. All details about the frequency of rate adjustments and the limits, or caps, on rate boosts must be disclosed at the time of application. The cap is usually about 2% a year and 6% over the life of the loan. You should also get full disclosure of any conversion rights and fees, which may range from a flat $250 to $1,000 plus points. Above all, make sure you understand the basis for rate adjustments. The lender usually pegs them 2 1/2 to three points above some published index, most commonly the one-year Treasury rate.

-- Kickbacks and referrals. A worrisome problem today is the practice by some lenders of giving kickbacks to real estate agents or others who refer house buyers to them. While kickbacks are probably not widespread, their very existence undermines the recommendations of all brokers. Some so-called loan finders charge fees for finding you a supposedly favorable mortgage. Your best protection against being misled or bilked, says Brian Chappelle, senior director of the Mortgage Bankers Association, is to check out the market yourself, getting quotes from four or five lenders.

BOX: Help Decisions by disk

Let's say you're buying a house that you figure to sell in around seven years. You are in the 28% tax bracket. Which of the following 30-year $100,000 mortgages is better for you: 1. An adjustable-rate loan with 1.5 points up front and an interest rate starting at 7.5%, with increases after that capped at two points a year up to a maximum rate of 13.5%? 2. A 9.5% fixed-rate plus two points? The answer, of course, depends on how much the rate goes up on your ARM. You can, however, still base comparisons on various interest-rate assumptions by using computer programs. If you own an IBM-compatible personal computer, you can solve the problem with the Mortgage Selector ($54.95 from Micro Planning System, 1499 Bayshore Hwy., Suite 214, Burlingame, Calif. 94010) or with the HSH PC Mortgage Update, a weekly service of HSH Associates (10 Mead Ave., Riverdale, N.J. 97457). The HSH software can also scan for low available rates. The diskettes for the New York City area and California contain mortgage data from some 80 lenders. A four-week subscription costs $39 for 5 1/4-inch diskettes and $49 for 3 1/2- inch diskettes.

BOX: Fill It Out How big a mortgage can you afford?

Before approving any mortgage, lenders decide how large a monthly payment you can afford. By filling out this worksheet, you can determine that amount -- and whether it covers the loan you want.

First gather the following facts about the house, the mortgage and yourself: 1. Price of the house 2. Down payment 3. Mortgage loan (line 1 minus line 2) 4. Interest rate and term of the loan If it is an adjustable-rate mortgage: 5. Highest rate increase permitted in any one year 6. Highest rate increase permitted over the life of the loan 7. Monthly real estate tax (annual tax divided by 12) 8. Estimated monthly home owners insurance premium 9. Your total monthly pay ments on all current loans 10. Your monthly income before tax deductions

Next, figure the largest monthly payment acceptable to most lenders. For a mortgage only: 11. Multiply line 10 by 0.28, then subtract the sum of lines 7 and 8 For all your debts: 12. Multiply line 10 by 0.36, then subtract the sum of lines 7, 8 and 9 13. Your payment limit is the larger of lines 11 and 12

Then use the accompanying table to figure the monthly payment on the mortgage needed to finance the house you want to buy. With a fixed-rate mortgage: 14. In the first column of the table, go to the interest rate that you entered on line 4 and across to the term of the loan, also on line 4. Figure the monthly payment for the size loan you entered on line 3 above. With an adjustable-rate mortgage: 15. First-year monthly payment (use the rate and term on line 4) 16. Highest possible second-year monthly payment (use the rate on line 4 plus the increase on line 5) 17. Highest possible monthly payment over the life of the loan (use the rate on line 4 plus the increase on line 6)

If the maximum second-year payment for an adjustable-rate mortgage (on line 16) is no larger than your limit on line 13, you can probably afford the loan. But weigh as well the worst-case possibility (on line 17). How soon could the rate reach the ceiling set on line 6? Is your income likely to rise enough by then to keep up with the payments?

Payment table

Look down the interest-rate column for the rate quoted by your lender, then across that row to the column for your mortgage term (15 or 30 years). The monthly payment shown at the intersection of the two lines is for each $1,000 borrowed. Divide your loan amount by 1,000 and multiply the result by the payment per $1,000. For example, if you need to borrow $100,000 for 30 years at 10%, go across the 10% row to the 30-year column. The payment shown is $8.78 per $1,000. Your monthly payment is $878, $8.78 times 100.

Monthly payments per $1,000 borrowed Interest rate 15 years 30 years

7.00% $8.99 $6.65 7.25 9.13 6.82 7.50 9.27 6.99 7.75 9.41 7.16

8.00 9.56 7.34 8.25 9.70 7.51 8.50 9.85 7.69 8.75 9.99 7.87

9.00 10.14 8.05 9.25 10.29 8.23 9.50 10.44 8.41 9.75 10.59 8.59

10.00 10.75 8.78 10.25 10.90 8.97 10.50 11.06 9.15 10.75 11.21 9.34

11.00 11.37 9.53 11.25 11.53 9.72 11.50 11.69 9.91 11.75 11.85 10.10

12.00 12.01 10.29 12.25 12.17 10.48 12.50 12.33 10.68 12.75 12.49 10.87