With fixed rates up, adjustable mortgages are looking good to borrowers again.

With mortgage rates hovering around 8%, the rush to ARMs is back on. But not all adjustable-rate mortgages are created equal. Not even the hybrid adjustables that are all the rage are identical, so borrowers should proceed with caution.

Adjustable mortgages have lower start rates than those with fixed rates. During the last few years, though, the difference between the two hasn’t been enough to persuade many borrowers to take on the risk that their rates--and therefore their house payments--could go up in rather short order.

But when rates on fixed loans began moving up steadily this year, the spread widened, and ARMs started looking good to borrowers who either couldn’t qualify at a higher rate or didn’t want to spend the extra money.

And loans that started with fixed rates and didn’t adjust until three to 10 years down the pike were particularly appealing.

According to the Federal Housing Finance Board, three of 10 conventional loans made in September were adjustable, up from just one in 12 in October 1998. And of the mortgages written just by savings and loans in September, 67% were ARMs.

Fixed-rate ARMs (also known as delayed first-adjustment ARMs) come in four varieties--three, five, seven and 10 years. That is, their rates won’t move until after they’re 36, 60, 84 or 120 months old. After that, though, their rates begin adjusting to market conditions on an annual basis. The loans are designated as 3/1, 5/1, 7/1 and 10/1, with the first number referring to when the first adjustment occurs and the second number meaning it adjusts annually.

As you might expect, the hybrids with the shortest fixed term offer the greatest price break. A 3/1 ARM averages 7.08% nationally vs. 7.22% for a 5/1 adjustable, 7.49% for a 7/1 and 7.64% for a 10/1, according to HSH Associates, a mortgage-information firm based in Butler, N.J. By contrast, the rate for a 30-year fixed-rate loan averages 7.83%.

All adjustables are tied to an index, which is a published measure of current interest rates. Lenders can use any index they like as long as it’s beyond their control and can be verified by their borrowers. But while about half a dozen indexes are in use, three have risen to the top--the T-bill index, COFI (the 11th District Cost of Funds Index), and LIBOR (the London InterBank Offer Rate.)

Virtually all fixed-rate ARMs are pegged to the one-year T-bill index, which tracks the average quoted yield for Treasury securities on a 12-month basis. There are some funkier versions out there, said HSH’s Keith Gumbinger. But those are oddballs. For the most part, the standard index for hybrid ARMs is the one-year Treasury bill.

Because almost all fixed-rate adjustables are linked to the same index, that’s one less choice a borrower has to make. But you still have to pay close attention to the margin, which is the amount the lender, like any retailer, adds to his cost for overhead and profit.

The margin, or spread, is one of the most critical factors in assessing the cost of adjustable mortgages. But it’s especially important in pricing hybrids because it’s the one thing that sets one lender apart from another.

Borrowers often confuse the index with the mortgage rate. But they’re not the same. While the index reflects the cost of money at any given time, your loan rate will be higher because the lender will add a couple of points to cover the cost of doing business.

Unlike the index, the lender’s margin won’t change over the life of the loan. If it does, the lender is breaking the law. But the greater the lender’s margin, the more expensive your payments will be.

According to HSH, which surveys more than 2,000 lenders every week, margins vary significantly. On a three-year, fixed-rate adjustable, margins recently ranged from 2.5 to 3 percentage points.

That’s not much. But the range was greater on the longer hybrids--2.25 to 3.25 percentage points on the five-year variety; 2.5 to 7 when the rate is fixed for seven years; and 2 to 3 points when the rate doesn’t change for 10 years.

Another factor many borrowers fail to consider is that with fixed-rate ARMs, annual and life-of-the-loan rate caps don’t come into play until after the initial adjustment. Consequently, that first change in your mortgage payment could be a real shocker.

Rate caps are intended as an insurance policy so that your loan costs won’t rise out of control. A periodic rate cap limits the change from one adjustment period to another, while an overall rate cap limits the change over the loan’s entire term. Most ARMs have both--usually 2 and 6 points, respectively.

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But since rate caps on hybrid ARMs don’t offer any protection until they switch to true adjustable status, they offer no initial protection whatsoever.

Thus, if market rates skyrocket, it’s conceivable that your rate could jump to the maximum allowable at the first adjustment. And that can put a serious dent in your budget.

Which is why it not only pays to shop around, it’s smart to get out while the getting’s good, cautions HSH’s Gumbinger. It’s the only way to guarantee your savings.

Right now, the mortgage market is in what Joe Anderson of Countrywide Home Loans calls the “ ‘tweener stage.” Rates are high enough for many borrowers to look into hybrid ARMs, but not high enough to consider true adjustables with rates that could change as often as once a year.

If rates continue to rise, though, Anderson and other mortgage professionals expect more and more borrowers to ARM themselves, many with one-year adjustables. And if that’s the case, borrowers will have to ponder not only margins and rate caps, but also indexes and teaser rates.

Your choice of index will probably boil down to one of the three mentioned above--the T-bill series, COFI or LIBOR. COFI is the weighted average cost of funds that flow into less than 200 savings institutions, mostly in California; LIBOR, an average of daily lending rates offered by several London banks.

The major differences between them is volatility. Generally, the Treasury and LIBOR indexes are the most sensitive and move more quickly than the COFI. If rates were to rise by 1 point today, the one-year T-bill index and the LIBOR benchmark would rise almost immediately. But it would be a good six to nine months before the increase is reflected in the cost-of-funds index.

The T-bill and LIBOR indexes also tend to fluctuate more wildly, with higher peaks and valleys. So in a rising interest rate environment, the experts say to pick the COFI, which lags the market.

Teaser rates could come into play if lenders start discounting their initial rates to hold--or, in some cases, to gain--market share.

If and when heavy discounting will return after what has been a six-year hiatus is anybody’s guess. But the Mortgage Bankers Assn. is predicting a 37% drop in loan volume between last year’s all-time high and next year’s projections, so it may not be far off. Indeed, James Witherow of FT Mortgage Companies believes that “reckless” pricing is on the way. Others in the financing business agree.

While some discounts will be lower than others, borrowers should also be sure to find out what rate kicks in a year or two when the markdown expires.

If the rate returns to what it was when the loan was made, you’ll know exactly where you will stand, at least until the first market-rate adjustment. But if it moves to the prevailing rate at the time the teaser rate terminates, you could be in for a rude awakening if rates go up.