In your column you suggest that five- and seven-year adjustable-rate mortgages could be a good deal for some people who expect to have their homes for only a few years. Are one-year ARMs worth considering? And if I already have a one-year ARM, should I keep it or refinance?

A few homeowners may save money by taking out new one-year ARMs now, but only if one of two things happens: They keep their mortgages for no more than a couple of years; or they get terribly lucky and short-term interest rates stay low for a very long time.

For people who already have these mortgages, the question is quite a bit trickier.

New one-year ARM rates averaged 3.11 percent in the first week of July, compared with 4.39 percent on five-year ARMs, 4.83 percent on seven-year ARMs and 5.23 percent on standard 30-year, fixed-rate mortgages.

With a one-year ARM, the homeowner gets a very low initial “teaser” rate for the first 12 months, then the rate adjusts on each anniversary. Typically, the new rate is figured by adding 2.75 percentage points to the rate paid at the time by one-year U.S. Treasury securities.

Most of these mortgages include a “cap” that prevents the rate from going up or down by more than 2 percentage points a year. A lifetime cap prevents the rate from ever being more than 6 percentage points higher or lower than the starting rate.

Currently, the one-year Treasury yields just under 1 percent, so that ARMs adjusting now charge only 3.75 percent, assuming a cap is not holding them higher. But it was less than three years ago that one-year Treasuries yielded more than 6 percent. Yields could move up if the economy starts heating up and the Federal Reserve raises short-term rates.

Rate risks

If you got a one-year ARM today, you could plan on refinancing to a fixed-rate mortgage if your rate climbed too high. But if short-term rates rise, the fixed-rate loans probably would, too. When the one-year Treasury last was more than 6 percent, in October 2000, the 30-year fixed mortgage went for about 8 percent.

As I mentioned, there are some borrowers who might benefit from one-year ARMs. Obviously, you could come out a winner if short-term rates stayed very low.

You also might do well if you make extra principal payments to reduce your outstanding debt. Each year, the new monthly payment on an ARM is calculated by applying the new interest rate to the remaining debt for a term that is one year shorter. The term starts at 30 years, then goes to 29, 28 and so on.

If you make extra principal payments, the monthly payment required will be lower. By continuing to plow these savings into ever-larger extra principal payments, you can dramatically reduce the payments required in the future. If interest rates do rise later, it thus won’t hurt you as much. By continuing to increase your principal payments you can pay the loan off early and save thousands in future interest charges.

The low initial payments required on new ARMs can be helpful to people who want or need to qualify for larger mortgages. Generally, lenders want your mortgage payment, including principal, interest, insurance and property taxes, to come to no more than 28 percent of your monthly income. With a lower rate, every dollar you can afford for interest payments will buy a larger loan.

If you are in this boat, think about whether you will be able to afford higher payments in the future.

Examine payments

As I said earlier, people who already have one-year ARMs have a tough decision to make. Because one-year Treasuries are now paying only about 1 percent, ARMs adjusting now may be charging only about 3.75 percent for the next 12 months. It’s awfully hard to bring yourself to exchange that for the 5.23 percent you could get on a fixed-rate mortgage.

Go beyond the interest rates to look at the payments you’d have to make in various situations. Suppose you keep the ARM and rates go up by 2 points a year to the maximum of 6 points above the rate at which you started. Could you afford that? What would that cost you over the remaining life of the loan?

How does that compare with the cost if you refinanced to one of those multiyear ARMs or a fixed-rate mortgage?

If you’ve had a one-year ARM for many years and have only a small debt remaining, it may not pay to shoulder thousands of dollars in refinancing costs. But if you got your ARM within the past few years, and the lifetime cap would allow your rate to eventually climb as high as 10 or 12 percent, it might well pay to refinance to a low fixed rate now, especially if you plan to have the home a long time.

Best look at the real numbers, figuring the payments you’d make at various interest rates. The business section of any good library or bookstore will carry a book of amortization schedules, which shows the payments required with various loan terms.

Better yet, use a computer. Financial programs such as Quicken and Microsoft Money have mortgage-payment tools. There’s a very good set of calculators on the Web site of HSH Associates, the Butler, N.J., rate-tracking firm, at www.hsh.com.