Adjustable-rate mortgages tack on interest-rate appeal

The first newspaper ads started running about two weeks ago. Boston's Provident Institution for Savings began offering adjustable-rate home mortgages for 10 3/4 percent, nearly two points below its fixed-rate mortgages.

Since then, says assistant vice-president William Mullin, the response has been ''overwhelming.'' In the first week, the bank received nearly 700 mortgage applications.

A similar thing has been happening at the offices of Empire of America Federal Savings Association, based in Buffalo, N.Y., with offices in Texas, Florida, and Michigan, as well as New York State. Since March 7, says marketing director Linda James, the S&L has been offering adjustable mortgages at 9 3/4 percent. In that time, Empire has written more than $450 million in mortgages for customers in its marketing areas.

After nearly four years in the 16 to 18 percent stratosphere, mortgage rates are finally starting to come down and people are coming back to the housing market. At many banks and S&Ls, the coffers are flush with deposits from the new money market and Super NOW accounts, where depositors can get yields ranging from 8 to 9 percent and still have the protection of federal deposit insurance.

''There's a ton of money (in the banks and S&Ls) just waiting to be used,'' says Alan Crittenden, publisher of a Novato, Calif., newsletter on real estate financing. Financial institutions ''have to get their money active somehow,'' he adds.

So with the help of these deposits and lower interest rates generally, the 30 -year, fixed-rate mortgage, once considered to be on its way to extinction, is coming back. At about 11 1/2 to 13 percent, people are making house payments larger than they might like, but at least they know those payments won't change.

But most lenders prefer adjustable-rate loans to avoid a repetition of the days when they were carrying a bunch of outstanding low-interest loans while the cost of their funds continued to rise.

To attract customers to adjustable-rate mortgages, then, lenders are being forced to widen the ''spreads'' between the fixed and adjustable rates. In some places this means coming down as low as 9 1/8 percent, a rate that disappeared about five years ago.

Besides bringing thousands of potential home buyers back in the market, the lower rates have come just in time for people holding three- to five-year balloon mortgages. Many of these loans carried rates of 17 to 18 percent and have to be refinanced or paid in full about now. Some S&Ls are refinancing these loans down to fixed rates of 13 percent or lower.

Consumers applying for these low adjustable rates, however, should find out a few things about them before signing on the dotted line:

* Is there a limit to how much the rate can move? At Empire, the rate cannot move more than two percentage points a year. This means people agreeing to a 9 3 /4 mortgage today know they won't be paying more than 11 3/4 percent a year from now. On the other hand, they could be paying as little as 7 3/4 percent.

On a $70,000 mortgage, monthly payments on principal and interest at the current Empire rate would be about $602; at 11 3/4 percent, they would be $707; and at 7 3/4 percent the payments would be $500.50.

* How often will the rate move? At many financial institutions, adjustable-rate mortgages were actually fixed at a specific rate for the first three years. But those mortgages usually carried a higher rate relative to the market than the ones currently being offered. With an adjustable mortgage in the 10 percent range, you will likely find that it is adjusted every year. However, there are some offering rates below 10 percent fixed for three years.

* What index will be used to adjust the rate? At Boston's Provident, the rate will be ''pegged'' to the most recent 91-day Treasury bill rate. At some other banks, there is no such peg and the rate may be set at any level the bank chooses.

* Is this an ''artificially'' low rate? Some lenders are using an arbitrarily low starting rate, say of 9 1/8 percent, to bring in the mortgage customer, expecting to rewrite the loan in four or five years at a higher rate. You will have the advantage of the low monthly payments for this time. But the new mortgage will be high enough to help the lender make up the income lost by giving you that earlier, lower rate.

''That could make for a heck of a jump in your payments,'' Mr. Crittenden notes.

* Are there any prepayment penalties? Say you sign up for a 9 3/4 mortgage today and next year you find a bank, S&L, or private mortgage company offering a 30-year fixed-rate loan at 11 percent. The monthly payments may be higher, but the assurance of a fixed rate makes the jump worthwhile. In this case you will want to be able to get out of the adjustable mortgage without penalties. Lenders can do this because they keep the adjustable mortgages on their own books, while fixed mortgages are sold to outside investors.

You will have to pay ''points'' again and a new application fee. A point equals 1 percent of the outstanding loan balance, and most lenders are adding a service charge of one to four points these days.

In trying to decide between a fixed and adjustable rate, take time to examine all the possible rates for both categories available in your area. Compare the monthly payments for the rate you are taking now and for what the rate might be in the future. Use this information to decide if you can afford a possible jump in payments.

For his part, Mr. Crittenden says, he ''wouldn't touch (a one-year adjustable mortgage) with a 10-foot pole.'' He would rather see home buyers pay 12 or 12 1/ 2 percent and not have to worry about rates going up again, which he sees happening within the next year or so.

And for those who qualify, 30-year fixed-rate mortgages backed by the Federal Housing Administration and the Veterans Administration carry an 11 1/2 percent rate. Some lenders may charge as much as four points service charge on these loans.

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