ADJUSTABLE RATE MORTGAGES - BIGGER BET, SMALLER PAYOFF.

Byline: GREGORY J. WILCOX

Federal Reserve Board Chairman Alan Greenspan's relentless boosting of the fed funds rate - eight consecutive quarter percent increases - adds up to a mixed bag for home buyers.

The news is better for those who opted for a traditional 30-year fixed rate loan, especially if they took the plunge this spring. Last week that rate fell for the ninth consecutive time, according to mortgage giant Freddie Mac.

Less so for buyers using shorter term adjustable products.

Those rates have been increasing.

When Greenspan moves up the fed funds rate, the interest banks pay to borrow money from each other, interest charged for loans like adjustable mortgages move up too.

But not all interest rates inhabit the same universe, which is why long term rates have been coming down.

``It is absolutely safe to say that long term mortgage rates don't necessarily respond to moves in short term rates,'' said Keith T. Gumbinger, vice president at rate tracker HSH Associates.

That's because long term rates tend to reflect a longer term view of the overall economy in terms of growth and inflation. A growth rate of 3 percent is forecast for the gross domestic product, and inflation, while warmer than in years past, is not accelerating.

Gumbinger says that there might even be signs of a deceleration of inflation.

And while adjustables key off the fed funds rate, the 10-year treasury bill sets the tone for the 30-year fixed rate mortgage. And cash-flush foreign investors have been buying up treasury bills, and this has a positive consumer effect in terms of rates.

In this kind of environment, with the Fed pushing short terms rates up and and the economic outlook upbeat, the difference between interest charged for adjustable home loans and the traditional 30-year fixed narrows.

So taking out an adjustable becomes a bigger bet with smaller payoff in terms of the monthly payment.

For example, here are the national average rates on several types of loans for the week ending Friday, according to HSH.

--The 30-year fixed rate was 5.74 percent.

--The 5/1 ARM was 5.19 percent.

--The 3/1 arm was 5.01 percent.

Over the years the spread between fixed and adjustable rates averages 0.71 percent, although in 2003 it widened to about 1.5 percent when the fed funds rate hit 40 year lows, Gumbinger said.

In the past seven or eight months, the spread has been cut in half.

Said Greg McBride, senior financial analyst at Bankrate.com.: ``The yield curve is flattening big time. Short term rates have come up a lot and they will continue to rise.''

But things are not as bad as they have been this decade. Greenspan's last move put the fed funds rate at 3 percent, matching where it was in mid-September of 2001.

At that time the 30-year fixed rate averaged 6.92 percent and the 5.1 ARM 6.92 percent.

If someone took out a one year adjustable on Friday with an interest rate of 4.49 percent, their monthly payment would change this time next year. Gumbinger said that if there is not a huge change in the rate landscape, it would adjust to a rate of about 6 percent, about a quarter percentage higher than today's fixed rate.

But he also offers this caveat.

``Forecasting rates has been particularly thorny.''

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com