With long-term interest rates spurting up and short-term rates soon to follow, the days of dirt-cheap mortgages are almost surely over.

Since mid-March, the average rates nationwide on 30- and 15-year fixed- rate mortgages have each jumped about 1 percentage point, to 6.34 percent and 5.72 percent respectively, according to Freddie Mac.

The average rate on an adjustable-rate mortgage that resets once a year (a one-year ARM) has jumped by half a percentage point, to 3.9 percent.

(The rates on jumbo loans over $333,700 are slightly higher.)

"If you have not already switched to a fixed-rate mortgage, you missed the 41-year lows last June and the 37-year lows last March. We are not likely to see those numbers again any time soon," says Keith Gumbinger, a vice president with HSH Associates. "That said, fixed mortgages at 6.5 percent are very attractive. For all of the 1990s, the lowest weekly average was 6.83 percent."

The difference between the rate on a 30-year fixed-rate mortgage and a one-year ARM is an unusually wide 2.4 percentage point.

That's because the yield on 10-year Treasury bonds, which is the benchmark for fixed-rate mortgages, has risen more sharply than the short-term interest rates to which adjustable rate mortgages are tied.

When this gap is wide, people tend to favor adjustable over fixed-rate mortgages, says Amy Crews Cutts, Freddie Mac's deputy chief economist.

Increase in ARMs

Indeed, the Mortgage Bankers Association reported on Wednesday that for the week ended May 7, ARMs accounted for 34.8 percent of all new mortgage applications -- the highest proportion in almost 10 years.

The problem with taking out an ARM today is that if interest rates rise over the next year -- as is widely expected -- your monthly payments could rise. If the rates shoot high enough, you could have been better off in a fixed-rate mortgage.

So what should you do if you are buying a home, refinancing a mortgage or sitting on a variable-rate home loan?

One way to hedge your risk is to take out a hybrid loan with an interest rate that is fixed for the number of years you plan to be in the house. The loan becomes adjustable at a set date.

Many experts see hybrids as a happy medium between fixed-rate mortgages and ARMs that reset every month or year.

Rate fixed for 5 years

If you plan to be in a house for five years, you could take out a 5/1 ARM. The interest rate will be fixed for five years and thereafter adjusted once a year.

The average rate on a 5/1 ARM today is around 5 percent. That's roughly midway between the rate on a 30-year fixed-rate mortgage and a one-year ARM.

If you sell the house after five years, you will have saved at least 1 percentage point per year in interest compared with a fixed-rate loan.

The risk is, if you stay in the house longer than five years and interest rates have shot up, you could end up with a rate much higher than the fixed one you passed up.

You can hedge that risk -- if you can afford it -- by making extra principal payments each month. After five years, when your rate resets, it will be applied to a smaller balance, and your monthly payment may not go up much, if at all.

You can get hybrids that are fixed for three, five, seven or 10 years. The longer the fixed-rate period, the higher the interest rate. The average rate on a 10/1 ARM, as of May 7, was 5.8 percent, according to HSH Associates.

When fixed rate is best

"If you are going to be in the home more than 10 years, you are better off locking in a fixed rate, even now," says Rande Spiegelman, vice president of financial planning with Schwab Center for Investment Research.

If you are going to be in the home for less than five years, Spiegelman says he'd choose a one-year ARM.

"You start at 4 percent. Say the Fed triples the (federal funds rate) from 1 to 3 percent over the next year or two. Hypothetically, the ARM goes to 6 percent. If you started at 4 percent, you (might pay) 4 percent for a year, 5 percent for a year, 6 percent for a couple more years. You average out at 5. 5 percent," he says.

That is still cheaper than the 6 percent or more you would have paid on a fixed-rate mortgage.

If you are going to be in the house for five to 10 years -- typical for most Americans -- Spiegelman says he'd consider a five-, seven- or 10-year hybrid.

"You can always refinance if rates end up coming back down," he says.

Jay Brinkman, a financial economist with the Mortgage Bankers Association, says hybrid loans are becoming increasingly popular with consumers.

His association counts hybrids as ARMs in its weekly survey of mortgage activity. Hybrids could be one reason ARMs are gaining a growing share of the overall mortgage market. (Another reason: Refinance activity is slowing down, and people who are refinancing mortgages are more likely to choose fixed-rate mortgages over ARMs.)

If you are choosing any type of adjustable-rate mortgage, including hybrids, look beyond the initial rate.

Look at the benchmark rate it is tied to, at the margin over that rate you will be paying when your interest rate adjusts, and at the annual and lifetime interest-rate caps.

Short-term rates

ARMS are tied to many different short-term rates, such as the yield on one-year Treasuries, the London Interbank Offered Rate Index (LIBOR) or the 11th District Cost of Funds.

The one-year Treasury and LIBOR are volatile, fast-moving rates that react quickly to economic news and sentiment. LIBOR is an average rate global banks charge each other to borrow U.S. dollars in London.

The 11th District Cost of Fund Index, which is an average rate paid by banks and thrifts on savings and checking accounts in the Western states, is slower moving.

"It will tend to move in waves rather than spikes," says Gumbinger. "That could work to your favor or disadvantage."

ARMs tied to indexes that are slower moving tend to come with higher margins, according to Greg McBride, an analyst with Bankrate.com.

Also look at the loan's interest-rate cap. A loan with a 5/2/5 cap "can adjust a full 5 percentage points in the first adjustment year. If it didn't max out in the first year, each year it can go up 2 percentage points a year. The lifetime is a total of 5 percentage points," says McBride.

"We see a lot of those. We used to see a lot of 2/6 caps, which allowed a 2-percentage-point increase each year and a total of 6 over the life of the loan," McBride says.

That would be better for the consumer because it limits the risk of a big increase. But you'll pay more for it.

If interest rates rise, "it's a fair bet to say that all ARMs will end up in pretty much the same ballpark. But the ballpark is pretty big," says Gumbinger.

There could easily be a one-fourth to one-half percentage- point rate difference between ARMs.

The lender "is going to pitch you on the lowest (initial) rate. You have to ask what happens next," Gumbinger says.

Home equity lines

If the Fed, as expected, raises the federal funds rate at its June and/or August meetings, the rate on home equity lines of credit will go up very quickly.

These variable-rate loans are usually tied to the prime rate, currently 4 percent. The prime moves almost in lockstep with the federal funds rate.

The average balance on home equity loans was about $36,000 last summer. The average rate today is 4.64 percent.

If you have a home equity line and are worried about rising rates, you could switch into a fixed-rate home equity loan.

But "anything fixed has a considerably higher interest rate," Gumbinger says. "If you know interest rates are going to be higher, one way you can offset risk is by prepaying that line down as fast as you can. A smaller loan balance at a higher interest rate won't have much difference on your monthly payment."

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